Why Single-member LLC’s Still Need an Operating Agreement

A lot of people don’t consider an operating agreement when creating their LLC, especially if they are the sole member. So why is it important?

Let’s first define an operating agreement. Simply put, an operating agreement is a contract that controls your LLC’s internal operations and the relationship amongst the members. Most states require that you have an operating agreement although you don’t file it with the state (New Jersey and New York have this rule). So with no other members in your LLC, are you making an agreement with yourself? Not quite.

One of the main reasons an operating agreement is just as important in single-member LLC’s as it is in multi-member LLC’s is because it allows the company to maintain its “limited liability”. Additionally, you have complete control over your LLC and it reflects your business preferences. Allow us to elaborate further below. Here are a few different reasons why having an operating agreement is necessary for your single-member LLC:

1. You want to avoid your state’s default rules

   With no operating agreement in place, the state law in which your LLC is formed will govern the LLC if ever there is an issue.

2. You want to leave a succession plan

   This one is major. Since we also practice estate planning law, we are always cognizant of protecting and preserving your assets, in this case preserving your business. An operating agreement can specify what happens if you die or become unable to run the business. Do you want one of your children to take over the business? or do you want a family member to wind down the business and transfer any assets to a trust for example? Without this specific provision in your agreement, your family may have a hard time continuing the business or winding it down. This can cause the LLC and ultimately your estate to lose a lot of money in the process.

3. You want to keep business and personal separate

   An operating agreement helps distinguish the business from the owner for liability purposes. The LLC protects a member from business liabilities while also keeping the business assets separate from a member’s personal liabilities.
  Without an operating agreement in place, the business may seem like a sole proprietorship. If a court doesn’t see your LLC as an entity separate from you, you could lose the liability protection that an LLC offers.

   This, along with commingling funds in one bank account will open your personal assets up to liability and defeat the whole purpose of creating an LLC in the first place.

These are the main reasons why a single-member LLC should always have an operating agreement. When starting a business, you want to ensure that you start off. A well organized and formed business will help propel your success because you won’t have administrative issues holding you back.

At Santos Legal Group we want you to be fully protected and in control of the LLC and its operations, which is why one of the additional services included in our business formation price is an accompanying operating agreement.

If you have questions specific to your situation, schedule your 15 minute FREE consultation call here or leave a comment below. We would love to hear from you!