Single-Member LLC Operating Agreement

Establishing your business as an LLC comes with advantages. You can shield your personal assets from business liabilities, and you may gain access to more flexible tax options. Even if you’re a single-member LLC, it’s still a good idea to create an operating agreement. Here’s a closer look.

What Is an Operating Agreement for a Sole-Owner LLC?

A single-member LLC operating agreement is a document that clarifies how the business is structured and run. It typically does the following:

• Establishes ownership
• Defines the company’s purpose
• States what will happen to the company if the owner dies or becomes incapacitated

Most states have default laws that apply to LLCs without operating agreements. If you think your state’s default rules might hinder your business goals, an operating agreement might prove to be financially advantageous.

Is This Agreement Required for Solo Owners?

Most states don’t require solo LLCs to have operating agreements. However, creating a single-member LLC operating agreement is highly advisable even if it’s not required.

Key Benefits of Having This Document

Most business owners understand the benefits of creating multi-member LLC operating agreements. However, single-member LLC operating agreements have ample benefits, too:

• By establishing the business as a separate entity, it protects personal assets if your company is sued.
• It lets you decide how to run your business instead of adhering to default LLC rules.
• It makes it easier to open a business bank account or apply for a business loan.

Your operating agreement also lets you establish a clear succession plan. Whether you want to dissolve your business after death or you plan to pass it down to an heir, an operating agreement can help solidify your choice.

Essential Provisions to Include

Your agreement should at least include the following:

• Company details and business address
• A statement that you are the sole owner
• Whether you’ll manage the company or choose a manager to do so
• An explanation of how you’ll handle profits and losses
• A statement that the LLC is responsible for all business debts and liabilities

In tax law, single-owner LLCs are “disregarded entities” by default. In other words, they’re taxed like a sole proprietorship unless you elect otherwise. In your agreement, you should either acknowledge that classification or state that you’re choosing to be taxed as a corporation.

How to Draft Your Agreement Step-by-Step

Once you’ve included the provisions above, you should sign and date the document. You don’t have to file it with the state, but make sure you keep a copy in a secure place. You’ll likely need it to apply for a business bank account. If someone sues your business, the agreement can help protect your personal assets.

Need to Create an Operating Agreement?

Whether you’re creating an LLC on your own or with other people, an operating agreement is essential. Taking the time to verify that your agreement is thorough, specific and up to date can help you avoid financial and legal issues down the line.

ConsumerShield is here to help you understand the nuances of business law and create legal documents that work for you. Take a look at our collection of legal document templates and guides today.