Why Your Single-Member LLC Needs an Operating Agreement

I hear it all the time: "creating an LLC is so easy! It only takes a few minutes!" Most investors log onto their Secretary of State's website, pay their fee and file the state form to create their LLC, and think they're done. Unfortunately, that's not the whole story. A limited liability company needs to have rules about operating itself, what happens when it's dissolved, or what kind of documentation needs to be kept. That's why you need an operating agreement. Although the state statute will provide default provisions in the absence of an operating agreement, sometimes these statutes contain some clever Easter eggs that if you don't know about them, you could be violating your own LLC's rules by running it in a different way! 

Here are a few simple points as to why every LLC needs an operating agreement.

1. LLC statutes are not tailored to SMLLCs. The provisions for bankruptcy, management structure and distributions are taken from the various equivalents in partnership and corporation law. They don't anticipate the possibility that the "membership" might only consist of one member. An operating agreement will make it clear that the single member has the authority to do the things without holding a meeting or a "vote." Taking action without following those statutory formalities can put you into default, especially if creditors or other third-party beneficiaries are involved.

2. Reduced risk of veil piercing. Nationwide and Ohio case law suggests that a single-member LLC is at a higher risk for piercing the veil of limited liability. Individually-owned SMLLCs with operating agreements will be in a better position to demonstrate "separateness" than one without one, since the operating agreement suggests that the business is being operated as a separate entity with a separate set of rules.

3. Third parties will ask for it. Your bank, insurance company, title company, etc., will occasionally want to see your operating agreement when you do business with them. These third parties may use this information as evidence that you are the manager of the business.

4. Your state's statute might cause your LLC to dissolve if you die. This is a big one, and it could really cause problems for whoever is administering your estate. This is an example of just one of many statutory "default" provisions that will apply if you don't write and sign an operating agreement. After all, if you're not in charge anymore, don't you want to be able to leave instructions about how your LLC should be handled?