If you’re the sole owner of a limited liability company, you might question, “does a single-member Limited Liability Company (“LLC”) need an operating agreement?”
What is a Single Member LLC?
An LLC is a business structure offering limited liability protection and certain tax benefits. In a single-member LLC, one owner maintains complete control of the company. Single-member LLCs are formed in the same way as an LLC with multiple members — by filing Articles of Organization with the Department of State and, in New York, fulfilling the LLC publication requirement within 120 days.
What is an Operating Agreement?
An operating agreement is a legal document that outlines an LLC’s operations and describes how it is managed. The agreement also specifies the agreements made between the members, including those involving their obligations, capital contributions, distributions, and voting. In the case of a single-member limited liability company, the document sets forth the agreement made between the owner and the LLC itself. Unlike a corporation’s Articles of Incorporation, an operating agreement is internal and need not be submitted to the Department of State.
The Importance of an Operating Agreement for Single Member LLCs
While drafting an operating agreement might seem unnecessary if there are no other LLC members, this document can still put vital information about the LLC and its operations in writing. A bank may request a copy of an operating agreement for you to open an account. Potential investors will also likely want to see it as proof of LLC ownership. Other crucial reasons to draft a single-member LLC operating agreement include:
- Establishing your business assets as separate from your personal assets
- Clarifying how LLC funds are distributed to the owner for record-keeping purposes
- Specifying a successor who will run the business if you pass away or become incapacitated
- Providing lenders with information about your company’s objectives and plans
- Creating rules that apply to the operations of your company that supersede the default rules set forth by state law
Even if you keep your company’s assets separate from your personal finances and open a bank account in the LLC’s name, creditors may raise a question regarding separation. Having an operating agreement in place can help alleviate any confusion and lend credibility to the LLC’s distinct existence. Without an operating agreement, an LLC can appear more like a sole proprietorship and potentially jeopardize your liability protection.
Contact an Experienced New York Business Attorney to Learn More
Having a well-drafted LLC operating agreement in place is vital to the success of your business. If you own a single-member LLC, it’s important to have knowledgeable legal counsel by your side who understands your company’s goals and is skilled in drafting operating agreements that meet your specific needs. Brinen & Associates has considerable experience guiding entrepreneurs through all stages of business development and drafting easy-to-understand and effective operating agreements. Call (212) 330-8151 to learn how we can assist you.