Operating Agreement for a Single-Owner LLC

By Joe Stone

The owners of an LLC are known as members. An operating agreement for a single-owner/member LLC is an important document that is useful in a number of ways. For example, the operating agreement can be used to alter default provisions under state LLC laws for operating an LLC that may be more suitable for a multi-member LLC than a single-member LLC. Although most states do not require an LLC to adopt an operating agreement, all states do permit it and an LLC owner should consider adopting an operating agreement tailored to the LLC’s business needs.

Protect Limited Liability Status

The most important aspect of any LLC is the protection it provides the personal assets of the owner from the debts and obligations of the business. However, this protection is not impenetrable and creditors will often attack the LLC's liability protection when there are insufficient business assets to satisfy the business debts. A common argument made by creditors in this situation -- known as "piercing the veil" -- is that the LLC and owner are not two separate entities, but one and the same in which the owner is treating the LLC assets as his own, similar to a sole proprietorship. The owner's counter-argument that the LLC is a separate entity can be supported by the simple fact that an operating agreement has been adopted by the LLC; that is, this shows the owner's effort to respect the formalities that differentiate an LLC from a sole proprietorship.

Specify Management Structure

All state LLC laws give the owner several management options for an LLC. It can be member-managed, in which all members of the LLC have authority regarding the LLC's day-to-day operations; there can be a designated single manager, who may or may not be an LLC member, or there can be several designated managers, including assistant managers. Without an operating agreement that specifies the LLC's management structure, the default management provisions under a state's LLC laws will apply, such as with Delaware's Limited Liability Company Act, which invariably defaults to the member-managed option. This management structure may not necessarily be desirable for a single-owner LLC. For example, this structure can be construed as lacking the separateness of identity between the LLC and owner for purposes of liability protection. Also, if there is no operating agreement indicating that a non-member, whether called a manager or assistant manager, has decision-making authority for the LLC, the owner may not be legally able to delegate authority in case of his absence or incapacity. A properly drafted operating agreement can address these issues and contingencies.

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Legal and Tax Documentation

An active LLC will invariably need to deal with potential lenders, creditors, tax authorities and other third parties in order to successfully carry on its business. Documentation is often necessary to validate company information and an operating agreement can serve this function. The provisions of the operating agreement can provide proof of such things including the company's internal management structure and decision-making authority, financial matters such as capital contributions and distribution rules, and contingency planning for continuity in management.

Complying with State Law

In some states, adopting a written operating agreement is simply a matter of complying with state LLC law. For example, Missouri and New York LLCs must adopt a written operating agreement regardless of the number of members in the LLC. Even states that do not generally require operating agreements may require an operating agreement for a single-owner LLC to be in writing, such as in Georgia, Kentucky and Ohio. In Illinois, unless a single-owner LLC has an outside manager, any operating agreement must be in writing. If a single-member LLC conducts business in several states, it may be prudent to adopt a written operating agreement to avoid the complexity and uncertainty that could result from going without an operating agreement.

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