An operating agreement is a document which describes the operations of the LLC and sets forth the agreements between the members (owners) of the business. So, if there is only one owner, is an operating agreement still necessary? The answer is, YES!
Why should I prepare an operating agreement for my single-member LLC?
- Description of Operations
As noted above, an operating agreement describes the operations of the LLC, listing the formation of the business and the procedures followed in the business. This discussion is helpful to the owner and a good way to ensure that appropriate records are being kept of proceedings.
- Separation of the Business
Having an operating agreement and keeping records of operations helps establish the separateness of the business from the owner for liability and tax purposes. If you don't have an operating agreement, you will find it more difficult to show that your business is separate from you. This is crucial, particularly if there is a liability issue.
- Clarifying Succession
An operating agreement also clarifies what happens if the owner dies or is unable to run the business. Your operating agreement should include a clause stipulating who will manage the LLC if you are unable to do so. Without this specific provision, it may be difficult for your family to continue the business or dispose of it without a lengthy legal battle.
- Avoid "Default Rules"
If an LLC has no operating agreement, it is subject to the "default rules" of the state in which the LLC is organized. These "default rules" are set out by the state. Letting the state tell you how to dispose of your business assets is not what you want for your LLC.
Back to All About Single-Member LLCs