The Value of the Operating Agreement

Does a single member LLC need an operating agreement? Technically, no, but it is still highly recommended. The purpose of the operating agreement is to state the operations of the LLC and set out the responsibilities of its members, including sole members, as is the case with single member LLCs. And although it is true that as a sole owner you will not have to worry about the roles of other members or the proper procedure for votes, the operating agreement still has much value.

For instance, having a well-drawn operating agreement can help establish that your business is operating as an entity separate from yourself. If you can’t do this, you may have difficulty enjoying one of the main benefits of the LLC: limited liability.

Limited liability means that you are not personally liable for debts or legal issues directed at your company. If separation between owner and company is easy to establish, as it generally is with multi-member LLCs, then limited liability is not in doubt.

However, for the sole owner of a single member LLC, showing separation may be more difficult. For instance, even though you may have a separate business account for your LLC, since you as the sole owner are the sole operator of that account, there may be some question of separation, especially amongst creditors. Having an operating agreement that clearly separates this and other areas of possible confusion can help the LLC maintain limited liability.

In addition to this, there are a number of other ways the operating agreement may be of value to you, such as:

  • If you are seeking funding, you can show it to potential lenders to give them an idea of your business’s plan and organization.
  • For financial and legal purposes, it can be helpful to show your distribution rules, decision-making authority, and capital contributions.
  • If you cannot manage your LLC — because of illness, for example — it will state who is to manage for you.
  • It allows you to create your own rules in regards to running your company; rules that supersede those in state business statutes.
  • Third parties, including but not limited to insurance companies, title companies, and banks, may want to see it when you do business with them.

Finally, if you do not have an operating agreement, your LLC must abide by your state’s “default rules,” which may not be in your best interest.

Areas to be Covered in the Operating Agreement

There are many areas that a good operating agreement should cover. They are:

  1. Ownership. For single-member LLCs, this is simple, since you will be the sole owner and thus have complete control of your company. It should be made clear that you are protected by limited liability from debts or legal action related to your LLC.
  2. Management. Your agreement should set out the responsibilities you will have in being the sole manager or what responsibilities you will delegate to any hired managers. You should state if you intend to be the sole manager and who your replacement should be in the event of disability or death. If you don’t, legal complications could arise if your family wants to continue your business or dissolve it.
  3. Distributions and contributions. Your agreement should state what capital contributions you will be making and, if these contributions are non-monetary, what their monetary value is. It should also state how losses and profits will be distributed to you, as they will be reported on your tax return.
  4. General rules. The basic rules of management for your LLC should be set out here.
  5. Statutes not tailored for single-member LLCs. Provisions for management structure, distributions, and bankruptcy were not originally fashioned with single-member LLCs in mind, and thus do not provide for the unique position of sole owners as far as running a company is concerned. Your agreement should clearly state that the owner has the authority to act without holding meetings or voting. If you take action without this being stated, you could end up in default, especially if third-parties, such as creditors, are involved.
  6. Dissolution. Although you may hope to never have to deal with this, it is good to have a plan laid out for how to wind down your company, should it be necessary.
  7. Signature. The operating agreement needs to be signed by you, the owner. Several copies should then be made, and each should be kept in a safe place. 

Online services are available to draw up your operating agreement, but going to an attorney who specializes in such matters is recommended. They can make sure all relevant clauses have been covered and also tailor the agreement to your state’s requirements.

So, does a single member LLC need an operating agreement? That question is ultimately for you to decide, but if you need more help understanding it, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.