What makes an LLC stand out among other legal strictures is its ultimate flexibility and adaptability. Not only is it a perfect match for a small starter venture but also it also lays a solid ground for future enterprise growth and will let you scale your business without getting into many legal changes. To solidify an LLC structure and make use of all the benefits it offers, it’s necessary to duly maintain it from the start. Proper document support will ensure that maintenance, and single-member LLCs need it no less than multi-member structures. So, even if you open an LLC on your own, consider creating an Operating Agreement to further enhance the beneficial legal status of your organization.
What Is a Single-Member LLC?
Most often than not, LLCs imply partnership relations when two or more persons share the same business idea and create a joint venture to bring it to life. Yet, the best thing about an LLC is that a single owner can also benefit from an incorporated business form. So, as the name suggests, a single-member LLC is a company established and owned by only one person. As opposed to a sole proprietorship, it separates you from your venture. Besides, it comes with all the advantages pertinent to multi-member LLCs including liability protection, pass-through taxation, and business assets independence.
Letting your venture function on its own and releasing you from business liabilities, a single-member LLC structure hosts a great growth potential by serving as a perfect base for realizing your business ambitions and aspirations. In the course of time, you can transform the structure of your venture by welcoming new partners to raise financing and catch up with the development of your venture. Hence, creating a proper formal framework for that sounds reasonable, and an Operating Agreement is a part of that framework.
Understanding an Operating Agreement
First off, this document is a company bylaw that needs no state registration and is meant to regulate day-to-day company operations and settle internal business affairs. On the other hand, though, it works to further enhance the legal status of your LLC, just from a bit different perspective. While the Articles of Organization formalize the company’s existence at a legal level and provide your organization with the status of a legal structure, an Operating Agreement is meant to shield this status by shaping up the relations between LLC members and managers and outlining other issues vital for ongoing company operation. As such, it’s a helpful and functional instrument for efficient business management and control that works for single- and multi-member LLCs alike.
Notably, an Operating Agreement is optional in most states. However, it’s a law requirement in such states as Delaware, New York, California, Maine, and Missouri. So, it’s worth thoroughly checking state requirements when launching a venture using an LLC structure.
Does a Single-Member LLC Need an Operating Agreement?
As stated above, the document is rather an internal paper, which is not required by law (unless you have an LLC in several states where it is compulsory). Yet, while you don’t need it at the formal level and can start and maintain an LLC without it in most cases, in practice, an Operating Agreement has a lot going for it, so having it in place is a reasonable business approach. The benefits this document offers are hard to argue with:
- If you want to manage your business your way, this bylaw will help you with that. Without it, your everyday company operations will be solely governed by default state rules. Though an agreement doesn’t cancel laws, it has a priority over routine rules and gives you more freedom in running your company as you deem necessary;
- In the eyes of the law, an agreement will further enhance an independent business status for your single-member LLC and help maintain tel liability protections provided by this status;
- Though you are the one to rule the show in your company, it’s always nice to have a formal paper that will give your venture a more organized and defined shape by describing the management system, contributions, and decision-making process;
- A well-structured organization looks more reliable and attractive to potential sponsors, creditors, and investors. It proves the seriousness of your business intentions and shows how you treat your company. Likewise, it will boost up your company’s credibility among customers and clients.
So, while an Operating Agreement feels like a formality for a one-member LLC, it will never go amiss to have it. Not only will it contribute to the market image and solid reputation of your enterprise but also it will set up a vector of development and growth path for your business.
What Should a Single-Member LLC Operating Agreement Contain?
LLCs exist under state statutes and statutory rules can slightly vary by state. The same is true when it comes to an Operating Agreement. So, it’s recommended that you first check any state requirements in this concern. However, speaking about the document content, there are several key aspects it embraces, no matter the state of your business formation. Hence, the core elements to include are as follows:
- Company profile: It’s a section covering basic info such as your LLC name, place of registration, purpose, and registered agent data. Here, you can also mention a chosen taxation method and the company duration if applicable;
- Ownership structure: Though you are the only one to own your enterprise, clearly state that in an Operating Agreement to show that no other could claim your company ownership and to make use of the liability protection to the full. You can also explain how to introduce new members, should you want to engage partners at some stage;
- Management structure: Obviously enough, you have entire control over your business. However, you should state if you are going to carry management responsibilities on your own, plan to share them with a hired manager, or fully delegate this function to a third-party director. If you pick a manager-managed model, outline the manager’s powers and rights to set up your relations with an executive director. Besides, in this part, you should appoint a successor to replace you if you are not able to perform this role for some serious reason;
- Equity structure: Anyway, business is set up for making money, so giving financial issues a due portion of attention is a must. Start with the contributions you’ve made in your venture. If you’ve brought not only money but also some assets or property, specify the value of those non-monetary endowments. Besides, address distributions and put down that you are a member the company profits and losses will be distributed to. If you plan to provide some type of services or support to your own venture, you can also add compensation for that under the rules set forth in an Operating Agreement;
- Company dissolution: Do you know that the Articles of Organization have no provisions for business dissolution? A formation doc only “brings a company to life.” Yet, to match the situations when you might want to terminate your enterprise, you need to have an Operating Agreement at hand. It will provide a plan of action to follow.
How to Write a Single-Member LLC Operating Agreement
Since an Operating Agreement is not a document to be filed with the state, there is no single fixed form for it. However, there is a whole number of fill-in templates available on legal websites as well as sample agreements across the Internet. So, given that most provisions of an Operating Agreement for a single-member LLC are self-explanatory, you can write it down on your own by taking the following steps:
- Download one of the free online forms and save it on your laptop or PC;
- Gather all the data you’ll need to fill in the template including but not limited to company details, LLC purpose, duration period, tax status, capital contributions, registered agent and manager information, etc.;
- Fill in the introductory part by putting down the document title, stating the LLC name, a form of ownership, and entering basic data about your LLC;
- Set forth the owner and manager rights, powers, and authorities. Determine the applicable governing law;
- Outline the provisions on capital contributions, profit and loss distributions, and indemnifications;
- Add clauses on company dissolution, succession, and transfer of rights if necessary;
- In case of an agreement for sole-member LLCs, it’s better to have your signature notarized to make sure the document is enforceable.
There is a whole wealth of legal resources where you can withdraw Operating Agreement templates and get free instruction on how to properly fill them in. However, to have a document that will be fully customized to your individual business situation and written in due legal language free from any dubious interpretations or vague definitions, it might be a good idea to involve a professional. You can hire a lawyer to assist you in compiling an agreement or write it down for you from scratch. Besides, if you create an Operating Agreement in the process of establishing a company, you can hire an LLC service to help you out with both your formation process and any maintenance aspects including not only an agreement but also a registered agent function, EIN registration, DBA filing, foreign qualifications, licensing issues, etc.