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Posted almost 9 years ago

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? 

Comments (6)

  1. Hello, I know I am resurrecting an old blog but this SMLLC interests me and I've been reading a lot on line now and it has gotten confusing.

    1) I reside in Florida, interesting in having 1-3 rental houses, based on my my research readings, all point to having an LLC to sleep better at night.   I realize all LLC's business needs to be conducted totally separate from any personal or any judge could cross the line and extend liability to me personally which I agree which.    But my question is I need to ensure that if I get hit by a bus, that my interest in the SMLLC passes on to my wife PROBATE FREE.  Is that possible?  I contacted an  estate atty and a brief convo over the phone, he mentioned that in Florida everything passes on to the spouse, but to avoid probate I would have to do a Multi-member LLC and give her votes.  Is that the only way?  That's not based on your blog above, do you know if Florida is covered by a simple OE? 

    2)  Is the Operation Agreement filed anywhere or just notarized and put in safe keeping?

    3)  I am reading that Manager-Managed is the best way to go, who would be the manager, my or my wife?

    Any insight is greatly appreciated, thank you!

    1. Hi Sam,

      Just read your post and wanted you to know that how you choose to set-up your LLC and write your Operating Agreement will take care of all the issues you mentioned.  The multi-member llc would cover the probate issue but you could do it one of 2 ways:

      1. Set-up an LLC that has voting shares and nonvoting shares.  You would have to make sure that Florida allows it because some states don't allow non-voting members or

      2. Set-up an LLC with you as 99% ownership and your wife as 1%.

      In either case you will have to have a section in your Operating Agreement called Management and a section that deals with Continuance of the Company.  The Management section will lay out who will run the LLC and what powers they will have.  You will then want to appoint yourself as Manager.  The Continuance of the Company is where you will want to clarify what happens in the event of your death and maybe even in the event of your incapacity (i.e. if you have a stroke or in a car accident and are unable to function for several months).  *** Remember that since you were acting as manager, you will have to account for who will continue in that capacity until you are well. ***  You may want to state that in the event of your death, your shares will automatically transfer to the remaining member (your wife) or your voting power transfers to her, etc.

      Anyway, everything depends on how you spell it out in your Operating Agreement so I would sit down and think about everything.  We have 2 separate businesses.  What really helped us was looking at several Sample Operating Agreements online and seeing what things we wanted included and how we wanted everything structured. This was important because in one of the businesses, several adult children were also involved so we wanted it structured in a way that allowed for them to all have shares but not all have say in the governance.  The ones who work in the business can have a say in its running or closing after we're gone, the others will have to be "silent" partners, no governance.  We even allowed for them to "buyout" their siblings and we had the conversation with all of them to explain our rationale.

      Hope this helps...

      1. Oh, and the Operating Agreement is not filed anywhere. It is just signed and kept with the rest of your LLC documents. It can also be revised as needed (the same way people amend bylaws from time to time).

  2. Thanks a lot for this helpful blog! 

  3. I am single member llc in Georgia....Can we talk? What should the O.A. state? I thought they were needed only if there was a deal with partners.... 

    1. Certainly. At minimum, a SMLLC operating agreement should state the following:

      1. The appointment of an assistant manager who will become the successor manager in case the member passes;

      2. The automatic assignment of the membership interest to a specific person if the member passes.

      This way, the operating agreement functions as something like a will for your LLC, and you can avoid probate or the messy situation if your LLC gets stuck in your probate estate.