Do Single Member LLCs Need Operating Agreements?

Even if it initially sounds like overkill, an operating agreement is essential for single-member LLCs. 

This article will break down the information that goes into a single-member LLC operating agreement, why it’s necessary for your business to have one, and how to get the perfect one in place for your small business.

Key Takeaways

• Operating agreements are not required by law, but they provide critical protections to LLC business owners, even those with just one member.

• A single-member LLC operating agreement protects the sole member’s personal assets and liability while making succession, partnerships, and dissolution easier.

• Because operating agreements for single-member LLCs are relatively simple, a professional service can provide one in minutes.

What Is an Operating Agreement?

An operating agreement is a legal document that acts as a contract between members of a limited liability company, or LLC.[1] If you’re the company’s sole member, the contract is between you and the company. 

The provisions of this agreement are enforceable in a court of law, and they essentially provide a set of rules that govern the LLC.

If you do not sign an operating agreement, applicable laws in your state will govern what happens to your small business if, for instance, you want to add a member or you cannot run the business yourself. It’s much better to make these decisions ahead of time in an operating agreement because state laws could prove problematic for your situation.[2]

Articles of Organization vs. Operating Agreement

When you’re the sole owner of your limited liability company, having a single-member LLC operating agreement in place is essential. Its most important function is to shore up your liability protection, but there are other reasons to sign one, which we’ll explore in more detail below.

5 Reasons Single Member LLCs Should Have an Operating Agreement

A single-member LLC operating agreement will put your small business on the right path. Consider these reasons for establishing an operating agreement for your single-member limited liability company and how they relate to your business.

1. Protect Your Personal Assets

As the sole member of your company, it’s imperative to establish your company’s business as a separate entity from your personal finances. Even if you have a different bank account for your business, if you’re the only member, creditors may still be able to “pierce the corporate veil” and seize your personal assets in a lawsuit or debt proceeding. 

Specific language in a single-member limited liability company operating agreement can boost your liability protections and safeguard your savings. This agreement documents your capital contributions and assigns you rights to profit distributions while still showing a clear separation between personal and business affairs.[3]

2. Gain Better Limitation of Liability

Not only will an operating agreement better protect your personal assets in the event of a lawsuit, but it can also clarify the company’s liabilities with partnerships, customers, and managers. This limited liability helps you avoid costly lawsuits from getting started in the first place.[4]

3. Prepare for Partnerships

For now, you might be the sole member of your LLC. But any single-member LLC operating agreement should contain provisions for incorporating new members, buying a new business or participating in a merger, and other such partnerships

Without operating agreement language that smooths these processes, bringing additional members in or undergoing liquidation could be difficult without folding and restarting the company.

4. Show Credibility to Lenders

A sole-member LLC operating agreement is essential because it shows good faith, professionalism, and credibility. Lenders, other potential investors, and partners will want to see that you’ve done the due diligence of creating an operating agreement. 

5. Avoid State Laws

If you don’t decide on your own governing law for your business, the state could wind up making decisions on behalf of the company. So it’s far better to plan ahead. 

For instance, who will take over if you cannot run the company? Your operating agreement can plan your succession so that state laws don’t interfere.

What to Include in an LLC Operating Agreement

Hopefully, you’re now convinced of the value of an operating agreement. To get you familiar with the document itself, here is an outline of a standard single-member LLC operating agreement.[5]

Basic Information

The first part of your single-member LLC operating agreement will lay out the standard identifying information of your business, much like your articles of organization. These details include, but are not limited to: 

• Place of business

• Purpose of the company

• Official name

• Registered agent

• Address

Your LLC operating agreement would also define you as the business owner and sole member of the LLC.

Management Structure

A section will detail the company’s management, stating whether the LLC is manager-managed or member-managed. If you are running the business yourself, it will be member-managed. If you are hiring someone to oversee the business, it will be manager-managed. 

This section would detail voting rights between members for a multi-member LLC, but as the sole member, you’ve got the only vote. 

Capital Contributions

This section documents your personal investment of initial capital in the LLC and allows you to make more capital contributions if you wish.

Taxation

LLCs can choose how they want to be taxed by the IRS and their state government. Most single-member LLC business owners will choose to pay income tax for their LLC on their personal tax returns. Your operating agreement may allow you to make other choices that would provide additional benefits for tax purposes.

Distributions, Bank Accounts, Records, and Fiscal Year

These sections entitle you to: 

• Distribute profits to yourself as you see fit

• Authorize you to open a bank account for the business and withdraw from it into your personal account

• Maintain financial records in the way that you decide

• Define your business’s fiscal year

Assignment

Here, you would specify your authority to assign your membership interest and power over the company to someone else without dissolving the business, as well as when and how that would happen.

Limitation of Liability

This critical section is where you will secure indemnification from the company for losses and damages. You will protect your personal assets from liability by separating them from the company's assets.

Exit Strategy

A “wind up” section will give you and only you the sole authority to close your business if and when the time comes. This process is also called dissolution.[6]

Do I Need a Lawyer to Create an Operating Agreement?

Given that, for now, you are the sole member of your limited liability company, it’s usually not necessary to have a lawyer involved when you draft your single-member LLC operating agreement. Like a sole proprietorship, you are free to make company decisions without stepping on anyone else’s toes.

If you plan to take on additional members or intend to start a manager-managed LLC, it may be useful to seek legal advice.

Create Your LLC Operating Agreement in Minutes

As the sole member of your own limited liability company, you have a lot on your plate. Swyft Filings can provide you with a rock-solid single-member LLC operating agreement in mere minutes. Here’s how it works:

1. Answer a few simple questions about your business.

2. Let Swyft Filings create a customized agreement for your business by drawing from expert-developed operating agreement templates.

3. Access your single-member LLC operating agreement in your online account.

Your operating agreement from Swyft Filings requires minimal effort and starts at just $35.

FAQs

Can I create my own operating agreement?

You can create your own operating agreement, though consulting a solid single-member operating agreement template, professional service, or attorney is wise.

Do I need an operating agreement if it’s just me?

An operating agreement is always crucial for any LLC. It helps strengthen your limited liability and protect your personal assets.

What should an operating agreement include?

An operating agreement should set out various rules and conditions about the business, including provisions that specify your sole membership, initial investment, limited liability, freedom to transition your business to others, and dissolution procedures.

How do you write a simple operating agreement?

A simple operating agreement will plainly state that you are the sole owner and member of the LLC, and your business assets are separate from your personal assets. Swyft Filings can provide you with a customized operating agreement in minutes.

Is a single-member LLC better than a multi-member LLC?

No LLC type is better than another. What matters is what works for your business and keeps revenues and profits flowing.

Bibliography

1. Cornell Law School Legal Information Institute. “Operating Agreement.” Accessed May 18, 2023.

2. U.S. Small Business Administration. “Basic Information About Operating Agreements.” Accessed May 18, 2023.

3. Small Business Development Center Duquesne University. “What Is an Operating Agreement? Does Your Business Need One?” Accessed May 19, 2023.

4. SCORE. “Why You Need an Operating Agreement: 8 Operating Agreement Tips.” Accessed May 18, 2023.

5. The University of Texas School of Law. “Model Company Agreements for Closely Held LLCs.” Accessed May 19, 2023.

6. SCORE. “5 Documents Your Business Needs Handy in 2022.” Accessed May 19, 2023.