I’m a Single-Member LLC. Do I really need an Operating Agreement?

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The short answer is: YES!

A single-member limited liability company or “LLC” is a one-owner business, much like a sole proprietorship. You alone are the only member and manager of the company.

The main reason you probably formed your single-member LLC is to protect yourself from legal liability as you run your business. Your LLC is a valuable “shield” against all kinds of potential business and financial risks.

However, in order to keep these legal protections, the law requires you to maintain legal formalities in your LLC’s operation and management. Maintaining legal documents that are contemplated by your state’s Limited Liability Company Act[1], such as an operating agreement and annual member meeting minutes, is great evidence that you are following the required formalities.

Your operating agreement should memorialize the “who”, “how” and “why” you formed the LLC, including under which state’s laws you are governed by. The agreement should also describe the operations of the LLC and set forth the procedures followed in the business (for example, how are you – the member – going to contribute and distribute funds from the company?).

Having an operating agreement can also avoid certain pitfalls that frequently occur with single-member LLCs.

One of these pitfalls happens when the owner wants to sell his or her business or pass it on to a child. If there is no operating agreement with provisions making it clear that during a voluntary transfer of the entire LLC membership interest, the selling member will cease to be an owner while the buyer will automatically and simultaneously be admitted as the successor member, you may be at the mercy of statutes that mandate dissolution of the LLC. In other words, the business you were trying to sell suddenly does not legally exist!

If you need help setting up a single-member LLC, please contact our Small Business team today.

 

[1] The Colorado Limited Liability Company Act can be found in Title 7, Article 80, of the Colorado Revised Statutes.

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