Is an operating agreement required for a single member llc

Even if you are the sole owner of a limited liability company (LLC), your business may benefit from an operating agreement. Although this key document is not required by law1, it can help you set out the rules and regulations of governing your LLC in a way that’s beneficial for both you and the company. A well-crafted operating agreement will include your plans for the business, which may help convince potential investors and lenders.

Besides, having a single member LLC operating agreement can help your business avoid state-imposed default rules. Keep in mind that LLCs are established by state laws. In case a problem comes up, your state of incorporation will apply its default law on anything that’s not covered in your LLC’s operating agreement and articles of organization. This is part of the reason why both multi-member and single-member limited liability companies need a comprehensive operating agreement. If you are the sole member of an LLC, you may download or copy our free single-member LLC operating agreement template (below) and customize it for you and your business.

Operating agreement template

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SINGLE-MEMBER LIMITED LIABILITY COMPANY OPERATING AGREEMENT OF [ENTER THE NAME OF YOUR LLC]

DATED AS OF [ENTER DATE]

This Operating Agreement (the Agreement) has been made and executed by [enter the company name], LLC (the Company) and [enter your name], its sole member (the Member), effective [enter date].

ARTICLE I

COMPANY ORGANIZATION

1.1. Formation. The Member formed the Company under the Limited Liability Company Act and the LLC state laws of [enter your state of incorporation]. This operating agreement is effective as of the date signed by the Member. The rights and liabilities of the Member, and the structure and management of the Company, shall be in accordance with the provision of this agreement, except as otherwise explicitly provided in the Agreement.

1.2. Company Name. The name of the company shall be [enter your business name]. However, the Agreement grants the Member and the Manager(s) the right to change the company name, subject to the provisions of the Agreement.

1.3. Term. The term of the Company commenced on the date of approval of its Articles of Organization by the Secretary of State [or State Commission, depending on the state in which you are forming the LLC] and will continue perpetually unless the Company is terminated per this Agreement or:

(a) If ordered by law,

(b) The Member resolves to terminate,

(c) In the event of the death, incapacitation, or retirement of the sole member,

(d) If the Company’s business becomes unlawful,

(e) Any other event resulting in the termination of the Company under the applicable state and federal laws.

1.4. Company Purpose. The purpose of the company is to conduct any business activities for which limited liability companies are legally and lawfully permitted to engage in under state and federal laws. The Company will do all things possible and necessary to achieve its set business objectives.

1.5. Principal place of business. The company shall maintain a principal office at [enter your business’s physical address], or at any other location selected by the Member under the advisory of the Manager(s).

1.6. The Member. The Member is the sole owner of The Company and retains exclusive rights in the Company, including, but not limited to the right to the Company’s assets, the right to receive distributions, voting rights, the right to manage the affairs of the Company, and the right to decide the direction of the Company. The name and address of the Member are listed in Exhibit 1 herein.

1.8. New Membership. Additional members may only be admitted following a written consent by the Member.

1.7. Registered Agent. The Company shall appoint and maintain a registered agent, whose name and address will be stated in the Articles of Organization.

ARTICLE II

CAPITAL CONTRIBUTIONS

2.1. Initial capital contribution. The Member shall make an initial capital contribution to the Company, as set forth in Exhibit 1. The capital shall consist of cash, real property and/or personal property.

2.2. Additional Capital. The Member may contribute additional capital from time to time whenever he, she, or it deems it necessary to increase the working capital of the Company.

2.3. Liability of the Member. Unless otherwise provided by applicable law, the Member is not personally liable for the acts, debts, liabilities and obligations of the Company in relation, but not limited to the Company’s torts and contracts. The Company shall defend, indemnify and hold the Member harmless against claims, losses, damages, costs and liabilities, including but not limited to settlements, fines, expenses and judgements arising from investigative, criminal and civil proceedings of the Company.

2.4. Liability of Affiliates. No person shall be personally liable for the Company’s liabilities, debts and obligations solely by reason of either being affiliated with the Member or being the Company’s officer.

ARTICLE III

DISTRIBUTIONS

3.1. Profit and Loss. All and any profits are losses of the Company shall be allocated to the Member. The Company’s profits and losses will be determined and distributed on an annual basis.

3.2. Distributions. All distributions of the Company, including but not limited to cash, profits, and property, shall be made to the Member on an annual basis or at any other time as determined by the Member, unless otherwise provided by federal and state laws.

ARTICLE IV

MANAGEMENT

4.1. Management of the Company. This Agreement hereby designates the Member as the sole manager of the Company. The Member shall oversee the affairs of the Company, and is hereby authorized to exercise full control and authority, which may include entering contracts, signing documents, and acting as the Company’s agent for the purpose of executing the business affairs of the Company. The actions and decisions of the Member are binding to the Company, unless such actions and decisions contravene this Agreement or state and federal Acts. The Member is authorized to make decisions on behalf of the Company as to:

(a) the individuals, firms and corporations appointed to oversee the business operations of the Company’s business affairs.

(b) the people and business entities appointed to manage all or part of the Company’s assets.

(c) the acquisition, purchase, lease and/or renting of the Company’s assets.

(d) the sale, disposal, lease and/or development of the Company’s assets.

(e) the granting of the Company’s assets as security interest for borrowed money.

(f) the refinancing, pre-payment and/or extension of loans that may affect the Company’s assets.

(g) the release and forgiveness of the Company’s debts and claims.

4.2. Nominee. Titles to the Company’s assets shall be held in the Company’s name and/or in the name of a nominee appointed by the Member. This Agreement hereby grants the Member the power to appoint a nominee, who shall hold the right to indemnity pursuant to Article II, Section 2.4 of this Agreement, except for the nominee’s willful misconduct.

4.3. Business Expenses. The Company shall bear the full responsibility of paying its own administrative, operating and overhead expenses of all kinds. The Member, the Manager(s) and other officers of the Company shall be reimbursed for all expenses they incur on behalf of the Company.

4.4. Officers and Delegation. The Member has the right to delegate any share of duties and authority to officers appointed to the Company. However, no such delegation shall relieve the Member of his, her or its responsibilities as stated herein. The member retains the full right to appoint officers to the Company, including but not limited to any number of:

(a) Chairmen

(b) Vice Chairmen

(c) Chairman Emeritus

(d) Chief Executive Officers

(e) Presidents

(f) Vice Presidents

(g) Secretaries

(h) Assistant Secretaries

(g) Treasurers

Appointed officers may or may not be employees of the company. Notwithstanding, an officer will hold office until:

(w) He or she formally submits a resignation,

(x) He or she is removed from office by the Member with or without cause, and by way of writing

(y) His or her successor is appointed by the Member,

(z) His or her position is voided by the Member.

All officers are hereby granted the authority to perform duties that further the day-to-day activities of the Company, subject to the authorization and direction of the Member, and the provisions of this Agreement. Officers shall perform their duties in good faith and with the diligence expected of a prudent person in a similar position.

4.5. Indemnification. In all transactions for or involving the Company, the Member and all officers shall act in good faith and in a manner that considers the best interests of the Company. Disregarding acts of willful misconduct, neither the Member not officers of the Company shall be held liable to the Company for losses and/or damages arising from acts of omission.

Unless otherwise provided by governing laws, the Company shall defend and hold the Member and officers of the Company harmless against any losses, judgments, damages, and other liabilities arising from criminal, civil, or investigative proceedings that he or she is involved or threatened to be involved in by reason of affiliation to the Company, including with no limit to amounts paid in settlement, fines, reasonable attorney fees, court costs, and other expenses incurred in such proceedings, as long as the Member or involved officer of the Company did not act in a manner that constitutes gross negligence and/or willful misconduct.

4.6. Liability Insurance. The Member has the power to purchase and maintain liability insurance policies in reasonable amounts on behalf of the Company, the Member and officers of the Company to cover liabilities that may be incurred by the Company, the Member or officers of the Company in their capacity as such.

ARTICLE V

COMPANY RECORDS

5.1. The Member shall maintain the following books and records either at the Company’s principal place of business or any other location deemed safe for storage of such documents:

(a) A copy of this Operating Agreement and any amendments that may be done hereafter.

(b) A copy of the Company’s Articles of Organization and any Articles of Amendment that may be filed hereafter.

(c) The latest record of the Member’s full name and physical address, including the street address.

(d) Complete books of accounts and financial statements for at least the three most recent calendar and fiscal years. The fiscal year of the Company shall begin on [enter date], except as otherwise necessary.

(e) Dedicated bank accounts for the Company, from which withdrawals shall only be made upon designated signatures as determined by the Member.

(f) A record of the Member’s tax election for the Company.

(g) Copies of the Company’s local, state and federal income tax returns and tax reports for the three most recent years. The Member shall be the only tax partner of the Company, but may elect an authorized agent to file and execute tax matters of the Company, and represent the Company before the Internal Revenue Service and any other tax body when required to do so.

(h) Titles to all the assets purchased and maintained in the name of the Company and for the benefit of the Company.

ARTICLE VI

ACCOUNTING AND BOOKKEEPING

6.1. Books. The Member shall maintain complete and accurate books of accounts for the Company. The Member has the free will to select the method of accounting for the Company.

6.2. Financial Reporting. The Member will close the Company’s books of accounts at the end of each fiscal year and prepare financial statements, or cause the statements to be prepared, for accounting, analysis and tax reporting purposes.

6.3. Capital Account. The Member’s capital account will consist of his, her, or its initial capital contribution with positive or negative gains from:

(a) Additional capital contributions made by the Member pursuant to Article II, Section 2.2.

(b) Distributions transferred from the Company to the Member’s capital account.

(c) Losses incurred by the company and charged to the Member’s capital account.

ARTICLE VII

TRANSFERS

7.1. Assignment. The Member has the right to assign, sell or otherwise dispose of all or any portion of his, her or its interest in the Company.

7.2. Bankruptcy. The bankruptcy of the Member shall neither cause the Company to be dissolved nor cause the Member to lose his, her or its membership in the Company.

ARTICLE VIII

DISSOLUTION

8.1. Dissolution of the Company. The Company shall be dissolved pursuant to Article I, Section 1.3 of this Agreement. However, the Member may not resolve to dissolve the company based on Article I, Section 1.3 (b) for a loss of membership interest. In the event of the admission of additional members pursuant to Article I, Section 1.8., the Company may only be dissolved with a mutual and signed agreement of all the Members.

8.2. Asset Distribution. Following the dissolution of the Company, the Company shall wind up its affairs by disposing of its assets and paying off all outstanding liabilities due to the Company. Remaining assets shall be applied to the Member’s capital account.

ARTICLE IX

MISCELLANEOUS

9.1. Governing Law. This Agreement shall be executed in accordance with the limited liability company laws of the State of [enter your state of incorporation].

9.2. Invalidity. In the event that any provision of this Agreement is judged invalid, the invalidity will not affect the other provisions herein, provided those other provisions can be executed without the invalid provision. To that effect, this Agreement is declared severable.

9.3. Third-Parties. This Agreement and all its provisions are not for the benefit of third-parties and may not be enforced by any third-parties, including and without limit to creditors, contractors and collaborators in any capacity.

9.4. Amendment. The Member retains the right to amend this Agreement at any time and for any reason. Any amendment shall be maintained in a separate record that will be stored together with this Agreement.

In witness whereof, the undersigned has caused the present agreement to be executed on this [enter date] day of [enter month], [enter year].

…………………………………………………

Signature of Member.

EXHIBIT 1

MEMBER CAPITAL CONTRIBUTION

Member Name                      ……………………………………………………

Member Capital Contribution  ……………………………………………………

What is an operating agreement?

An operating agreement is a legal document that lays out the ownership of a limited liability company, along with its member duties, and the rules and regulations of managing the LLC. The agreement allows business owners to put in writing important information about ownership percentages, operation, management officials, principal office, and registered agent.

For single-member LLC owners, an operating agreement can set out the working relationship between the business owner and managers. It guides the management team in decision making, pretty much in the same way that corporate by-laws help the board of directors to make decisions about a corporation.

However, while corporations are legally required to have by-laws, LLCs are not mandated by law to have operating agreements. But it’s always a wise idea to have one anyway regardless of whether you are the sole owner of the LLC or a shareholder among others.

A multi-member LLC operating agreement is particularly important because it also outlines financial and working relations between the various members. This can be a very helpful tool for conflict resolution in a multi-member LLC.

Ideally, the best time to create an operating agreement is as soon as you form your LLC. Therefore, if you are currently forming a startup, now would be the best time to seriously consider drawing up your operating agreement. Use the document to:

• Communicate your business plan to potential investors and lenders,
• Establish how your company will operate,
• Separate personal finances from business finances for increased liability protection,
• Describe how you will pay yourself, and
• Plan for continuity of the business in case of a trigger event such as bankruptcy, incapacitation or death.

You can make the operating agreement as general or as specific as you need for the best interests of the company and you, the owner. And while you can create your LLC’s operating agreement on your own using our free single-member LLC operating agreement template, don’t hesitate to seek legal advice from a professional lawyer should you feel overwhelmed.

How an operating agreement works

The purpose of an operating agreement is to outline who owns an LLC, how it’s managed, and its structure. In the case of a multi-member LLC operating agreement, the document becomes a legally binding contract between the various members of the company.

Apart from preventing future misunderstandings between owners (or between a sole owner and the LLC’s management), an operating agreement may also protect the company by establishing rules for running the business.

Once you have your operating agreement penned and signed, you should keep it in a safe location, but where you can access it whenever you need to refer to it. Since it’s an internal document, you don’t need to file it with the secretary of state (or state commission) as is the case with LLC articles of organization.

Does a single-member LLC need an operating agreement?

While it’s not a legal requirement to have one, single-member LLCs do need an operating agreement. As the sole owner of a limited liability company, you may use your operating agreement to create a financial separation between you and your LLC, describe the structure of the business, illustrate your plans to potential lenders and investors, and avoid state default rules. It essentially provides an objective blueprint for how your business will operate.

The benefits of an operating agreement are more apparent to multi-member LLCs because it establishes initial capital contributions and helps solve misunderstandings between the members. As is the case with sole proprietorships, single-member LLCs do not face such issues. But there are still many advantages of having an operating agreement. Below are some reasons why a single-member limited liability company may want to have an operating agreement:

• To describe the LLC. A single member limited liability company operating agreement establishes the structure of the business, its formation and the procedures to be followed when making certain key decisions. The document can also list the company’s principal office, its principal place of business as well as the appointed registered agent. While it may not necessarily address initial capital contribution since there’s only one member, the agreement can describe how LLC earnings should be distributed to the owner. This is important for bookkeeping and objective financial management.
• Prevents default state rules. Having a single member LLC operating agreement ensures that your business isn’t bound by the default rules of your state of incorporation in case of a liability or litigation. By creating this document, you essentially establish your own rules for the company.
• Separates the LLC from the owner. A single member LLC operating agreement clearly defines the business as a separate entity from its sole member. By doing so, the agreement helps protect the personal assets of the owner from business debts and liabilities, as provided for in the Limited Liability Company Act6. This is particularly important for small business owners with closely held companies, since such businesses are more prone to getting their corporate veils pierced.
• Establishes a management plan. You can use an operating agreement to lay out how you want your business to run on a day-to-day basis. This includes describing the rights, powers and responsibilities of various management officers. Beyond that, an operating agreement can set out rules on how investments will be acquired and used. Many lenders and investors will use this section to determine whether or not you have a viable plan for growth.
• Succession planning. You can use a single-member LLC operating agreement to describe what should happen in case of your permanent absence – whether due to bankruptcy, incapacitation or death. Without an operating agreement in place, your business may fall into a legal battle as creditors, family members and other stakeholders struggle for the control and ownership of the business and its assets.

What to include in a single-member LLC operating agreement

The contents of a single-member LLC operating agreement vary widely between companies. However, many of them contain at least six sections: organization, capital contribution, management, distributions, transfers, and dissolution.

Remember, you can make yours as comprehensive or as short and concise as you need it to be. It’s very much possible to have a one-page operating agreement, especially if you are the sole member of the company. Nonetheless, below are the key sections that a typical LLC operating agreement contains:

Article 1: Organization

The first section of an operating agreement covers the LLC’s creation. It details the following information:

• Affirmation that the company has been created or will be created with the state. The LLC creation process typically involves filing articles of organization with the secretary of state or state commission, depending on your state of incorporation.
• The members of the limited liability company. As the sole owner, you will be the only member. 
• Basic information of the LLC, including its legal company name, principal office, principal place of business, purpose, and registered agent.
• The trigger events that may lead to the dissolution of the LLC, and whether or not it can continue even after a trigger event happens.
• Criteria for adding new members.

Article 2: Capital contributions

Even as the sole member of the LLC, you will still need to buy into the business by providing initial capital contribution. Whether it’s cash, an asset or any other source of business capital, it will provide you with ownership interest. This section can also include the various ways of raising additional capital for the business.

Article 3: Distributions

This part of the operating agreement covers the allocation of profits and losses (to you, since you are the only member). This typically happens on an annual basis and may include cash, physical property and other business assets. Distributions usually come after the business has paid its due expenses and liabilities.

Article 4: Management

Since you are the sole owner of the LLC, you essentially call all the shots. But of course, you have to do it objectively. That’s why this section covers your powers and responsibilities. Powers may include things like scope of control, direction and operations while responsibilities are record keeping, signing contracts etc.

You should also include personal liability protection in this part of the agreement. This essentially states that you are not personally responsible for the debts and obligations of the business. It’s a great way to keep personal assets safe from lawsuits brought against the LLC.

If it were a multi-member LLC operating agreement, it would include the voting rights of each member under this section. It would also contain the voting quota needed to pass important decisions about the LLC.

Article 5: Wages

These refer to your wages. It’s important to pay yourself a salary, particularly if you provide any service to the business. In fact, the Internal Revenue Service (IRS) has reasonable salary requirements for business owners whose LLCs are taxed as S corporations. By drawing a salary, you’ll be able to maintain a clear distinction between your finances and those of the LLC. This too will help in liability protection.

Article 6: Accounting and bookkeeping

This part of your operating agreement describes how you will keep financial records and the accounting procedures to follow. For example, you can choose to use single-entry accounting – which is what most small businesses use – and specify so under this section. At the end of your fiscal year, you’ll close your accounting books and prepare financial statements (like balance sheets and income statements) that may help you better understand the financial health of your company.

Something else that you will need to specify is your preferred tax election for your company. By default, the IRS taxes single-member LLCs as sole proprietorships. However, you may elect to be taxed as an S corp or a C corp. The choice you make will have a big impact on:

• Your personal income tax liability,
• Your company’s corporate tax liability, and
• How you file corporate and personal tax returns.

For example, if you elect the sole proprietorship or S corp status, the IRS will ignore your business for tax purposes. This means your LLC will not need to file any tax returns. Instead, it will pass its earnings to you, and then you will pay income tax on your individual income tax return. This can help you save time and paperwork because you won’t be filing corporate taxes. Even better, S corp distributions are not taxed at federal level; only the wages you pay yourself are subject to IRS taxes.

The same can’t be said for C corps, which are usually subjected to double taxation – first at business level and then at shareholder level. Plus, the C corp status will see you file two different classes of taxes – a corporate tax for your business and an income tax for the money you get from owning the business.

The bottom line is that the tax status you elect matters. It can potentially lower your tax liability and reduce the number of taxes you have to pay.

Article 7: Transfers

As the sole member of an LLC, you can decide the conditions under which you may admit additional members. This section describes these conditions. It basically explains if and when you can transfer some of your ownership to new members.

While many small business owners prefer not to think of unfortunate trigger events like bankruptcy, incapacitation and death, it’s always wise to anticipate and plan for them accordingly. You can specify exactly what should happen to your LLC should such an event occur. Should the shares be transferred to your family? Do you have a preferred successor in mind?

Whatever the case, this section of your operating agreement can prevent the dissolution of the company, more so if the default governing law requires single-member LLCs to be dissolved in case a trigger event occurs.

Besides, putting everything in writing will help you avoid taking up unnecessary and avoidable members. For example, if you don’t have an operating agreement that limits transfers, a creditor can sue your business and get awarded membership interest.

Article 8: Dissolution

Define the circumstances under which your LLC may or must wind up. The company typically commits to paying off any existing debts before making distributions.

Other parts of an LLC operating agreement

In addition to the eight articles above, a single-member LLC operating agreement can cover any additional number of topics. It all comes down to how comprehensive you want your document to be. Most of the time seeking legal advice will help you figure out what you need to include and what you can remove from the agreement. For example, some small business owners may want to specify the responsibilities of the people who will be appointed in managerial positions. It’s also a good idea to include an article that describes how the operating agreement may be amended. Once you’ve captured everything you need, you can end with exhibits and signatures.

• Exhibits: exhibits of an operating agreement are spaces where you fill in information such as the list of members. For single-member LLCs, you will basically write your name, address and details of your initial capital contribution.
• Signature: every legal document requires a signature to make it binding. Therefore, go ahead and sign the operating agreement. Once that’s done, you can make copies (don’t forget a digital copy) and store the original in a safe place.

Frequently asked questions

Do I need an operating agreement?

All limited liability companies – including single-member LLCs – that are located in California, Delaware, Maine, Missouri, Nebraska, and New York are legally required to have an operating agreement. All other states make it optional, but it’s wise to have an operating agreement anyway, even if your business is a single-member LLC. You can use the document to set out the rules of running your LLC. Besides, it will help you avoid the default governing laws of your state.

What if an LLC has no operating agreement?

Any limited liability company that has no operating agreement is automatically bound by the default state law. In case of litigation, the court will make a ruling entirely based on the governing law set forth by the LLC’s state of incorporation. If, for example, you incorporate an LLC in California and fail to write an operating agreement for it, all judgment on litigation will be done based on the California LLC Act.

How do you change the operating agreement for an LLC?

Amending an LLC’s operating agreement is fairly simple and straightforward. If you are the sole owner, simply document the change you need to make, and then file the amendment along with the original operating agreement. In the case of a multi-member LLC, you will need the signatures of all the members, approving the change. And since it’s an internal document, you won’t have to file it with your secretary of state as is the case with articles of amendment.

References

1. Uniform Law Commission. “Limited Liability Company Act, Revised.” 21 Jun. 2022, https://www.uniformlaws.org/committees/community-home?CommunityKey=bbea059c-6853-4f45-b69b-7ca2e49cf740

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