Single-Member LLCs and Operating Agreements
A single-member LLC (Limited Liability Company) business is a one-owner business. The SMLLC is like a sole proprietorship, but being an LLC has advantages in limiting your liability and acting like a "real" business.
One of the ways to act like a real business is to have the same type of documentation that other Limited Liability Company owners have. An LLC with more than one owner (called "members")" has a document called an operating agreement that is prepared with the help of an attorney when the business begins.
What an Operating Agreement Is
An operating agreement is a document which describes the operations of the LLC and sets forth the agreements between the members (owners) of the business. All LLC's with two or more members should have an operating agreement. This document is not required for an LLC, but it's a good idea in any case.
An operating agreement is similar to the by-laws that guide a corporation's board of directors and a partnership agreement, which is used by partnerships. By-laws are required for a corporation, but a partnership agreement is not required.
As a matter of fact, a partnership agreement and the operating agreement for an LLC are very similar, since these two types of businesses function in similar ways.
Why an SMLLC Operating Agreement Is a Good Idea
If there is only one owner of an LLC, is an operating agreement still necessary? The answer is, YES! Here are four reasons a single-member LLC need to prepare an operating agreement - and abide by it.
The Operating Agreement Describes the Organization
As noted above, an operating agreement describes the operations of the LLC, listing the formation of the business and the procedures followed in the business. The agreement also clarifies how LLC funds are contributed and distributed to the owner. This discussion is helpful to the owner and a good way to ensure that appropriate records are being kept of proceedings.
The Operating Agreement Separates the Business from the Owner Personally
Having an operating agreement and keeping records of operations helps establish the separateness of the business from the owner for liability and tax purposes. If you don't have an operating agreement, you will find it more difficult to show that your business is separate from you. This is crucial, particularly if there is a liability issue.
The Operating Agreement Clarifies Succession
An operating agreement also clarifies what happens if the owner dies or is unable to run the business.; that is, it creates a succession plan. Your operating agreement should include a clause stipulating who will manage the LLC if you are unable to do so. Without this specific provision, it may be difficult for your family to continue the business or dispose of it without a lengthy legal battle.
An Operating Agreement Avoids State LLC "Default Rules"
If an LLC has no operating agreement, it is subject to the "default rules" of the state in which the LLC is organized. These "default rules" are set out by the state. Letting the state tell you how to dispose of your business assets is not what you want for your LLC.
Get Help From an Attorney
You can use online services to create an operating agreement, but you are better served by getting the help of an attorney. Your attorney can make sure all the relevant clauses are included, and he or she can tailor the document to the requirements of your state.