Limited liability companies are becoming the order of the day. Everyone is gradually learning that they can establish businesses without putting their personal assets on the line, which is hugely beneficial. However, even if you’re going at it alone, you should put together a single members LLC operating agreement.
Yes, it can feel silly putting together a single members LLC operating agreement with yourself if you’re the only owner of your LLC. However, a single members LLC operating agreement can do a lot to secure your limited liability status and help your business arrangement scale if you ever choose to add partners. Here’s how a single members LLC operating agreement works and what you need to know before you set one up.
What’s a Limited Liability Company (LLC)?
First, let’s address this basic question. A limited liability company is a business entity whose owner or owners are protected from its losses and debts. These structures are prominent in the United States.
The business formation of a limited liability company is a combination of the features of a corporation, a partnership, and a sole proprietorship. It has a corporate veil, there are sometimes partners, and there can be just one owner. It’s a very flexible type of business, making it very popular.
The main purpose of LLCs is to protect the owners from the business’s liabilities and protect the business from the business owners’ personal liabilities. The owner or owners of an LLC are not directly liable for any loss incurred by the company and can’t be held accountable personally for any debt that the company owes. The LLC structure keeps the business entity separate from your personal affairs, protecting your personal assets in the case of catastrophe. Many business owners also opt for LLC for tax purposes, as they don’t lead to double tax implications like some other corporate structures.
What’s a Single-Member LLC?
As the name implies, a single-member LLC is a limited liability company that has a sole owner just like a sole proprietorship. This type of business entity is fast gaining prominence among entrepreneurs in the United States and is regarded as the best bet for any entrepreneur who is looking to start up.
The difference between a single-member LLC and a sole proprietorship is the liability protection we mentioned above. In a single-member LLC, the owner is protected from the business liabilities. The company and its business assets are also protected from the liabilities of the owner, just like in a multi-member LLC. Thus, rather than simply filing their business transactions as a sole proprietorship, many solo entrepreneurs choose to make things official with an LLC.
What’s an LLC Operating Agreement?
The limited liability company operating agreement is a legal document and one of the initial steps of creating an LLC. This document’s main purpose is to guide the operations of the newly formed LLC. Here are some of the areas a standard operating agreement for an LLC covers:
- It details the mode of operation as well as the roles and legal requirements of each member of the company.
- It contains the rules and regulations that guide the daily activities of the business, thereby making it an essential document in the business structure. A
- It contains the ownership percentage of members, rights, capital contributions, and responsibilities.
- It details the obligation of each office and stipulates how the profits and losses of the company will be administered among members.
- It stipulates what will happen to a member’s share or interests when such member wants to leave or dies and how the shares and interests should be allotted should the company dissolve.
Why a Single Members LLC Operating Agreement Is a Must
Many people make the mistake of believing that creating an operating agreement is not necessary for a single-member limited liability company. Don’t make this mistake! Even if an operating agreement is not an essential requirement to start an LLC, its importance cannot be over-emphasized. Here are some of the main reasons why your single-member LLC needs an operating agreement, even if it’s not one of the legal filing requirements.
Have Your Own Rules
Without an operating agreement, your limited liability company will be subject to the state’s default rules. While this is not a bad thing, you don’t really want it for your business. You own your business, and you know why you are establishing it. Therefore, you need your own set of customized rules, not default rules or default provisions. Crafting your own rules ensures that your goals for the business are realized as early as possible.
Further, Protect Yourself
As we’ve already mentioned, an LLC limits liabilities in that it protects its members from losses and lawsuits that arise from the business. Likewise, it protects the business from the lawsuit and debts of the member. The LLC operating agreement reinforces this. It points out the fact that the business is a separate entity. Without an operating agreement, you can be easily mistaken for a sole proprietor, which could lead to unnecessary complications.
Give Room for Growth
Since it is many business owners’ dream to make some profit and grow their company, it would not be so good for your LLC if you kickstart it without making room for growth! An operating agreement lets you do this in that you can stipulate what will happen in the event of expansion. It is good to make plans for growth so that when the time comes, you will not have to alter anything in your business structure to make room for it.
In your operating agreement, you can stipulate what will happen if the company attracts investors and business partners and how they will be treated. Aside from this, banks may require the operating agreement of your business if you ever need to apply for grants or a business loan to bolster initial capital contributions. You do not want the lack of this important document to deny your business of needed funds.
Take Control of Your Business
An operating agreement is supposed to be a guiding document for your company. By delineating basic functions, from an annual report to partnership agreement details, you can maintain full control of your business with an LLC operating agreement.
Even if you hire a manager to oversee the business for you, an operating agreement lets you stipulate the operations of the principal office, manager role, and its responsibilities. It helps you put your employees in check and gives you ultimate control. It keeps you abreast of every situation such that even when you are far away, your employees know what to do and are legally bound to do it.
Components of a Single Members LLC Operating Agreement
There isn’t much difference between a multi-member LLC operating agreement and a single members LLC. Now that you understand why this document is so crucial, we’ll highlight the details that should be included to make up your single member’s limited liability company operating agreement.
- Name of the company
- The physical address of the business premises
- Purpose of the business and the service it will provide
- Name and contact details of the registered agent
- Duration of term of the business
- Method of distribution of profits and losses
- Ownership and percentage of ownership
- Membership and capital
- Information on business bank accounts and financial institutions
- Information on the safekeeping of business records
- Information on indemnity
- Information on limitation of liability
- Information on the business succession plan
- Dissolution clauses and other relevant clauses
Get Help with Your Single Members LLC Operating Agreement
Are you ready to set up your single members LLC operating agreement? You can avoid spending a whole lot of money and going through a lot of stress by having the right legal documents in place. At A People’s Choice, we are dedicated to helping you save as much money as possible by helping you with legal documents. Our aim is to reduce the number of times you visit the attorney’s office.
While you can get a template from any online service, we can provide you with the best operating agreement template and any other key documents, such as your LLC articles of organization, for a very reasonable fee. Our customizable operating agreement template will have all the details you want it to have. Make sure to contact us to ensure an effective yet inexpensive legal document experience!
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