Should a Single-Member LLC Have an Operating Agreement?

If you’re the owner of a single-member LLC, you may be wondering if you need an operating agreement for your business. It’s a valid question. You may assume that since you are the sole owner you probably don’t need an agreement. After all, you are in complete control of the business. But this assumption is incorrect. While you might be tempted to forego an LLC operating agreement, I encourage you to consider otherwise because there are some significant advantages to having one.

An LLC operating agreement may be a new term for you, so I want to explain a few details about LLC operating agreements in general:

• An LLC Operating Agreement is not valid unless signed by its members.
• Some financial institutions request to see a signed copy of an LLC’s operating agreement before opening a bank account for the business.
• LLC operating agreements are not mandatory in most states, but they can be immensely helpful in ensuring that the entity’s affairs are managed properly.
• States don’t require LLCs to file their operating agreements with the Secretary of State, but an LLC should keep its operating agreement at its principal place of business.
• What LLC operating agreements include varies because different businesses have different items to address. I’ve listed examples of some of the information usually found within them:
  • Members’ names, initial financial contributions, and ownership percentages
  • Management structure (member-managed vs. manager-managed)
  • Members’ responsibilities and decision-making authority
  • Voting rights
  • Schedule for member meetings and record-keeping procedures
  • Distribution of profits and losses among members
  • Registered agent information
  • Description of what shall happen to the LLC if a member dies, leaves, or sells their ownership interests
  • How the LLC should be dissolved

Benefits of a Single-Member LLC Operating Agreement

An operating agreement does much more than dictate how to distribute profits and how to handle disputes between members of a multi-member LLC.

Here are three important ways single-member LLCs can also benefit from an operating agreement:

1. Demonstrates legitimacy – An LLC operating agreement is a legal document that helps legitimatize the business as an entity separate from its owners. Having an operating agreement for a single-member LLC helps demonstrate the legal separation between the business and the owner, reinforcing the member’s personal limited liability protection in the event of a lawsuit against the company.
2. Ensures the fate of the LLC is carried out according to the business owner’s wishes – An operating agreement can provide specific instructions about what should happen to the LLC if the single member were to pass away or otherwise be unable to run the business. Without an LLC operating agreement, the state’s default rules will apply — which may not be what the member wants to happen.
3. Helps secure funding – If an LLC owner needs funding to grow their business, having an operating agreement can help them obtain it. Some banks and investors may request to see an LLC’s operating agreement before they approve a loan or provide other financing.

How to Create an Operating Agreement for a Single-Member LLC

You have several options for creating your operating agreement. Here are a few to consider:

• Have an attorney prepare it for you – This offers peace of mind that your operating agreement covers all the essentials. The downside is it can be costly to use an attorney’s services for writing the entire document.
• Order an LLC operating agreement online through CorpNet – This will save you time and money by generating an LLC operating agreement draft, which you can customize to your specific needs.
• Write it yourself – While this is the most inexpensive way to go, you risk omitting important points if you don’t know what to include.

After an LLC member drafts their operating agreement, it’s helpful to have an attorney review it to ensure it has all the necessary elements and is worded appropriately.

Frequently Asked Questions

How much Is an operating agreement?

The cost of producing an LLC operating agreement can vary depending on the method you choose to prepare the agreement and whether you have an attorney review it. Notary fees also apply if you have your agreement notarized (usually, those costs are inexpensive).

Because states do not require LLCs to file operating agreements, no state fees are associated with them.

Does an LLC operating agreement need to be notarized?

Most jurisdictions do not require the notarization of LLC operating agreements. However, having your document notarized can be advantageous because it provides proof of its authenticity.

What is the difference between an operating agreement and an Articles of Organization?

Articles of Organization is what most states call the registration document they require for forming a Limited Liability Company. An LLC operating agreement is the internal governance document that describes how the LLC member(s) should operate their registered business entity. While an operating agreement may be optional, Articles of Organization are necessary. Without filing Articles of Organization (which might be called a Certificate of Organization or another name depending on the state), the LLC does not exist.

What if your LLC has no operating agreement?

Should your company run into any legal issues, you will be without a critical document that can help demonstrate you’re following the necessary procedures and protocols for treating your company affairs separately from your personal affairs.

Also, If you die, the fate of your business and its assets will depend entirely on your state’s laws.

What happens if you add additional members to your LLC?

If you have an operating agreement for your single-member LLC and you add another member, you will likely want to create a new operating agreement for your multi-member LLC. With multiple owners, your LLC will have considerations it didn’t have before, such as distributing profits and losses among members, defining each member’s roles and responsibilities, and dispute resolution procedures for disagreements among members.

Is an operating agreement the same as bylaws?

Both are internal governance documents that business entities use to outline how they should be run. Limited Liability Companies use operating agreements while Corporations use bylaws.