Creating a Single-Member LLC Operating Agreement

Are operating agreements required for single-member LLCs?

That depends on what you mean by “need.” In most states — all but five, to be precise — an operating agreement isn’t legally required. If an LLC chooses not to draft an operating agreement, it’s governed by your state’s default rules for LLCs.

From a practical standpoint, however, an operating agreement is an important tool, especially for multi-member limited liability companies. A multi-member LLC operating agreement acts like a constitution for the business, dictating how each member’s rights are protected and regulating business affairs for the LLC.

A single-member LLC owner might wonder if creating an operating agreement is even worth the effort. It usually is. Not only does an operating agreement lay a foundation for future growth, but it also lets you customize the terms of how your business works. Plus some banks ask to see your agreement before they’ll issue a business bank account or a loan. And most importantly, an operating agreement helps solidify your limited liability protection. 

So in most states, an SMLLC doesn’t have to draft an operating agreement. But it’s almost always worth the effort.

What elements should you integrate into your single-member LLC operating agreement?

Every LLC’s operating agreement will look a little different since each business has unique needs. But most include the same basic details, which we’ll talk you through.

If you think you’ll need to heavily customize your document, you may want to solicit the help of a business attorney. We also offer a guided, customizable operating agreement template that can simplify the process for you.

1. SMLLC Name and Information

This section is pretty simple: you’ll set out the name of your LLC and some of your basic information. For example, you’ll want to list the legal names and addresses of each member (just you, in this case), where your offices are located, and the name and address of the registered agent who’ll accept service of process for the LLC. You might also include a brief explanation of your business purpose.

Most of this information was probably already set out in your Articles of Organization, so this section is pretty straightforward to complete.

2. Ownership Percentages

This section is pretty simple since you’re the sole owner of the LLC. You’ll have the only stake in the business, so you’ll have 100% of the ownership.

3. Distributions

Again, this section is pretty simple for an SMLLC. As the only member, you’ll be the only one receiving a share of the business income. But how often will you distribute profits to yourself? Quarterly? Whenever you wish? Once a month? This section is where you’ll describe your distribution schedule and procedure.

One quick word of caution: be sure to appropriately distribute business profits to yourself. If you never take any distributions, or you take less than the appropriate share, the IRS might suspect you of dodging their share of self-employment taxes, Social Security contributions, and income taxes. This is a bigger concern for multi-member LLCs, but it’s still a pitfall you’ll want to avoid.

It’s important to understand that, in an LLC, the members pay federal income taxes on the business’s profits, regardless of whether it’s distributed to the members’ individual bank accounts. You can’t temporarily avoid paying taxes on the LLC’s profits by keeping those profits in the business bank account.

4. Management Structure

By default, an LLC has a “member-managed” management structure. That’s when the owner of the LLC is also the one running the day-to-day affairs of the business. And for many SMLLCs, this default approach works perfectly because they want to be the sole manager. But maybe you’re starting a single-member LLC as its investor and hiring another person to manage it for you, paying them an appropriate salary for their efforts. That’s a manager-managed LLC.

Both approaches are completely valid, but in your operating agreement, you’ll need to describe which management structure you have.

5. Membership’s Responsibilities

This is another section that’s pretty easy to complete since you’re the only member; odds are you’ll handle all the responsibilities. But if you’re going to hire a contractor to handle certain tasks for you, this is the place you should say that. At the very least, you should put in writing what your responsibilities will be.

6. Meetings and Voting Rights

You can’t exactly have a meeting with yourself or vote against yourself, now can you? Your operating agreement should briefly acknowledge that meetings are unnecessary and that you hold the only voting rights.

7. Changing Membership

Somewhere down the road, you might want to add another owner to your LLC. Or you might add a few owners and later discover that one person needs to part ways again. Your operating agreement should describe the procedure for adding or removing members.

For example, if there are certain reasons a member might be forcibly expelled from the LLC, you’ll want to describe those. Or maybe you’ll explain the percentage of votes a member addition or subtraction needs to pass. Perhaps members need to contribute capital when they join. And what happens to a member’s capital contribution if they leave the LLC?

The important thing is that you make provisions for the future with this section.

8. Financial Procedures

In this section, you’ll want to describe a few different financial decisions for your business. For example, will your LLC be taxed under pass-through taxation on your federal tax return, or will you elect C corporation or S corporation status? You’ll want to describe this choice in your agreement.

Your operating agreement might also describe your accounting method, if and when you’ll obtain business loans, and more.

9. Procedures for Ending the SMLLC

When you first start a business, the last thing you want to think about is dissolving your LLC. But preparing for a worst-case scenario can save you from tons of headaches if you ever actually have to close up shop. You can set out what will happen to your business assets, how business debts will be settled, and more.

On a similar note, you should also describe what will happen with your SMLLC if something happens to you. For example, will a family member inherit your business? Will it close down completely? Or will you cede ownership to a fellow professional in the industry? It’s ultimately your call, but providing this information in your operating agreement is essential to your SMLLC’s long-term success.

10. Process for Amending the Agreement

You never know how your business can change in the future, so it’s helpful to draft a section that explains how you can update your agreement.

11. Severability Statement

It’s highly recommended to create a quick severability statement. This is usually a boilerplate section that states that if one section of your agreement is voided by a court, the rest of the document is still valid. Basically, if one part of the agreement is bad, you won’t have to rewrite the whole thing.

Why even bother having an operating agreement for a single-member LLC?

It’s easy to see the immediate need for an operating agreement if you’re operating a multi-member LLC. But single-member LLCs might wonder if it’s worth the effort.

If you’re in a state that legally requires an operating agreement (California, Delaware, New York, Maine, or Missouri), then obviously you need one to be compliant. But in other states, it’s still worth having an operating agreement. Here are some of the benefits of the operating agreement for SMLLCs:

• Prevent future legal battles: Whether you eventually add new members, have to step away from the business, remove a rogue member, or any other change, an operating agreement can help make a transition as seamless as possible.
• Enlist the help of other vendors or investors: We’ve already mentioned that banks may ask to see your operating agreement before issuing an account or loan. But other entrepreneurs or investors may also ask to see your agreement before they’ll get involved with your business.
• Maintain your personal liability protection: Because an operating agreement so clearly delineates the finances of the LLC, it helps establish a firm line between the business’s finances and yours. That helps maintain your personal asset protection by further proving your LLC is a completely separate entity.
• Customize your business terms: If you don’t create an operating agreement, your LLC will be governed by your state’s LLC statutes by default. Customizing your agreement lets you create a governing document that truly fits your business’s unique needs.