As the name provides, a single member LLC is a limited liability company where there is only one owner called a member. Some may refer to it as sole member LLC or simply ‘SMLLC’ for short. Although there is only one owner, the LLC is a legal entity that is separate and distinct from its owner. To make sure that this separation is clear cut, a single member LLC should have a single member LLC operating agreement.
What is a Single Member LLC Operating Agreement ?
A single member LLC operating agreement is a written document that not only states the fact that the owner and the SMLLC are two separate and distinct entities, but it also contains the rules that the company should follow in its daily operation and management. An operating agreement for single member LLC lays down details that will guide business decisions, financial transactions, and even employee interactions. It is an internal document, which means it is not required to be published or registered in a government agency.
Because this type of LLC only has one member, which is very different from multi-member operating agreement, an operating agreement for a single member LLC only requires one signature -- the signature of its only owner. This means that the member can decide what to include and what not to include in the operating agreement. Once signed, the SMLLC operating agreement will bind the owner as well as the entire LLC, including its officers and employees.
To get an idea of what an operating agreement looks like, look for a free single member LLC operating agreement template online from CocoSign.
When and Why Is a Single Member LLC Operating Agreement Necessary?
Not all states require a single member LLC operating agreement before a company can do business or register as an entity. Nevertheless, having one is highly recommended and will come in handy once the single member LLC starts transacting with third parties.
Many banks, for instance, demand to see an operating agreement before it approves a loan application. Similarly, most investors look for an operating agreement before they agree to part with their money. That’s because a single member operating agreement typically shows capital contributions, decision-making authority, and distribution of profits and losses.
Most importantly, a single member LLC operating agreement protects both the owner and the LLC in case of liability.
What to Include in A Single Member LLC Operating Agreement?
As a single owner of your LLC, you are free to write your operating agreement any way you want. Note, however, that some states require certain provisions to be included or not varied in any way. These provisions are often called non-waivable provisions.
Basically, you want to include the following information in your single member LLC operating agreement:
Details on company formation
- Company name
- Principal office address
- Where and when your Articles of Organization was registered
- Designated registered agent and office
- Powers and purposes of the company
- Administration and management
- Rule on termination of membership
- Rule of Succession
- Compensation and entitlement to reimbursement
- Initial capital contribution
- Additional contributions made
- Profits distribution
- Share in losses
- Recording of books
- Fiscal year
Dissolution of the LLC
- Grounds for dissolution
- Winding up and liquidation process
- Indemnification and liability
- Governing law
Apart from the non-waivable provisions required under the law of the state where you intend to register your LLC, there are other details that you need to consider when drafting a single member LLC operating agreement. These are:
- Whether or not an operating agreement is required by law in the state where you intend to do business
- Whether or not you need a registered agent
- Whether you will manage your company or you will appoint or hire a manager
- How and when you will get paid
- Under what circumstances will the LLC be dissolved
- Who will succeed the single member in case of death or incapacity of him or her
While these key considerations may not be something you want to think about now, ensuring that they are settled as early as now can give you a better sense of direction as well as peace of mind.
Frequently Asked Questions
Will my LLC be penalized if we do not have an operating agreement?
Technically, no. While an operating agreement is not legally required to do business as an LLC, it’s highly recommended to have one to help run your company smoothly. Be that as it may, an operating agreement does not guarantee smooth-sailing operations. Moreover, having an operating agreement does not give a company the right to break the law just because the agreement permits the same.
Can I amend the single member operating agreement?
You can certainly amend the single member operating agreement. Note, however, that it must not be contrary to law or unreasonable.
When should I start writing an operating agreement?
You should start writing an operating agreement as soon as you decide to organize a single member LLC. Start by downloading a single member LLC operating agreement template that you can easily fill up.
Should a single member LLC operating agreement be registered?
There is no need to register your operating agreement unless otherwise required under the laws of the state where you intend to register your SMLLC as a legal entity.
What is a single member LLC articles of organization?
The single member LLC articles of organization is an external and public document that is required by law before an LLC can be registered in the state.
A single member LLC operating agreement is crucial to protect your personal assets as well as the assets of the limited liability company. CocoSign has made it easier for you to draft a sample single member LLC operating agreement. Check out our free, easily downloadable templates today.
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