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Single-Member LLC Operating Agreement

Many sole proprietors want liability protection for their business activities. So, they create a single-member limited liability company (LLC) with the secretary of state. For business owners starting a new company, understanding the importance of an LLC operating agreement is crucial. This document is not just a formality. It's a significant part of ensuring your business runs smoothly.

In this article, we'll focus on single-member LLCs. We will discuss how their operating agreements differ from other business entities.

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What Is an LLC Operating Agreement?

An LLC operating agreement is a key legal document for LLC owners. It outlines how the business will run and includes basic information like the business purpose, capital contributions, and how profits and losses will be shared. The LLC operating agreement will have information on whether the LLC is member managed or manager managed. In a member-managed LLC, the owner directly oversees business affairs. In a manager-managed LLC, they appoint someone else to handle these tasks.

If you form a corporation, you create bylaws to govern your company. If you form an LLC, you draft an operating agreement to do the same thing. Think of the operating agreement as a playbook for your company. This agreement helps the business be seen as a separate entity, protecting the owners' personal liability.

Does a Single-Member LLC Need an Operating Agreement?

Yes. Even a single-member LLC needs an operating agreement. It's a common belief that, with only one member, such an agreement might be unnecessary. However, having this document offers legal protection and clarity. It reinforces the fact that the LLC is a separate entity, which is important for tax purposes and personal liability. There are several reasons why an LLC needs an operating agreement, even if you are a sole member.

Necessary for Bank Accounts and Financing

To open a business bank account, a bank requires a copy of the LLC's operating agreement and the articles of organization. If you are looking for a bank loan or investment in your company, you will most likely need an operating agreement. The reason is that potential lenders and investors want to see how you have set up your organization. Additionally, they look for what happens if you die or dissolve the company.

Meets State Requirements

Some states, such as California, Delaware, Maine, Missouri, and New York, require LLCs to have operating agreements. It may jeopardize your corporate status with those states if you don't. And therefore, your liability protection is at risk.

Outlines Company Rules and Framework

The operating agreement sets forth the rules of your company. State law will govern if you do not mention how you want something handled. So, for example, if you want the LLC to end after your death, you add a termination or dissolution clause. If you do not have such a clause, state law might dictate that the LLC go to your heirs.

Affirms Limited Liability Structure

One of the reasons you formed a limited liability company is for protection from business liability. Therefore, if someone were to sue the LLC, they can only go after the assets in the LLC and not your personal assets.

You state in your operating agreement that the member of the LLC is not responsible for the debts, obligations, or liabilities arising from the business. Such a statement shows that you intend to operate as a limited liability business structure, not a sole proprietorship.

What To Include in a Single-Member LLC Operating Agreement

A single-member LLC operating agreement is very different from a multimember LLC operating agreement. Namely, you are the sole owner and, therefore, the only member of the LLC.

The provisions of your single-member LLC operating agreement should include:

  • Name of LLC
  • Principal Place of Business
  • State of Organization/Formation
  • Registered Office and Registered Agent
  • Operating the LLC in Another State (Foreign LLC)
  • Duration of LLC
  • Purpose of LLC
  • Powers of LLC
  • Statement of Limited Liability
  • Membership and Contributions
  • Records and Accounting
  • Dissolution or Termination

Your operating agreement is your plan for how to manage the company. Therefore, you may add other items as you wish. It is also a good idea to have your signature witnessed by a public notary.

To give you an idea of what an operating agreement might look like for a single-member LLC, we have provided a sample.

Single-Member LLC Operating Agreement Template

Single-Member Limited Liability Operating Agreement of

_______________________________________

This OPERATING AGREEMENT OF A SINGLE-MEMBER LIMITED LIABILITY COMPANY ("Agreement") made and entered into as of ___________________, 20_______ by ___________________ ("Member").

ARTICLE I. Company Organization

  1. Company Name and Formation. The name of the single-member Limited Liability Company ("LLC") is __________________.
  2. Principal Place of Business. The LLC's location of the principal place of business is _____________________________________________ or at a location the Member selects.
  3. State of Organization. The LLC's articles of organization filed with the ____________ Secretary of State on ____________, 20__ shall be subject to ____________ state law.
  4. Registered Office and Agent. The registered office and registered agent of the LLC shall be as stated in the articles of organization.
  5. Qualifying Foreign LLC. The Member shall comply with all requirements to qualify this LLC as a foreign limited liability company in each state or jurisdiction in which the LLC conducts business.
  6. Duration. This LLC shall continue for a perpetual period unless (a) the Member dissolves the LLC, (b) it is unlawful for the Member to carry on the business of the LLC, or (c) any other event dissolving this LLC under applicable state laws.
  7. Purpose. This LLC shall conduct any lawful purpose as outlined in the articles of organization.
  8. Powers. The LLC shall have all necessary powers, including (a) to create and perform all contracts, (b) to borrow or lend money, (c) to employ persons or companies, and (d) to engage in all activities and transactions related to the purpose of the LLC.

ARTICLE II. Governing Agreement

When this Agreement differs from applicable state law, this Agreement shall be the governing agreement to the extent permitted by law.

ARTICLE III. Limited Liability

Unless otherwise required by applicable law, no member of this LLC shall be liable for the obligations, liabilities, or debts of this LLC.

ARTICLE IV. Management

  1. Single-Member. This LLC shall be managed exclusively by the Member. The Member shall make all decisions and take all actions for the LLC.
  2. Meetings. Meetings shall be held at the principal office of the LLC or at the place and time of the Member's choosing.
  3. Officers. The Member may appoint the Member or others as an officer of the LLC to conduct LLC business. The Member may appoint a President, Treasurer, Secretary, or other officers and remove such officers. The officers shall act under the direction and management of the Member.

ARTICLE V. Membership and Contributions

  1. New Members. An individual may become a member of the LLC if approved by the Member.
  2. Membership Contributions. The Member may contribute any tangible or intangible benefit to the LLC or other property of any kind, including cash, promissory note, services performed, or real property.

ARTICLE VI. Profits, Losses, and Distributions

  1. Profits/Losses. The LLC's net profits or net losses shall be determined annually for financial accounting and tax purposes.
  2. Distributions. The Member shall determine and distribute funds as they see fit.

ARTICLE VII. Records and Accounting

  1. Records and Reports. At the LLC's expense, the Member shall maintain all records and accounts of the operations and expenditures of the LLC.
  2. Tax Returns and Statements. The Member shall prepare and file all required federal and state tax returns and statements on the LLC's behalf at the expense of the LLC.

ARTICLE VIII. Dissolution

Upon the death, resignation, legal incapacity, or bankruptcy of the Member, the LLC shall be dissolved.

CERTIFICATION OF MEMBER

The undersigned Member agrees, acknowledges, and certifies this Agreement signed this ___ day of ______, 20___.

MEMBER Signature: _____________________

MEMBER Name: ________________________

Notary Signature: ________________________

Notary Name: ___________________________

Do You Need an Attorney for a Single-Member LLC Operating Agreement?

The operating agreement for a single-member LLC is pretty straightforward. However, you may have questions about handling the LLC if you die or can't manage the company. It is helpful to consult a small business lawyer about drafting an operating agreement that provides for many contingencies.

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