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5 Reasons Your Single-Member LLC Needs an Operating Agreement

An operating agreement is a contract that controls your LLC’s operations as well as member interactions with each other and with the LLC. You may think that an operating agreement is not necessary for your single-member LLC - after all - why make an agreement with yourself?

Is the Operating Agreement a Legal Requirement?

Most states don’t require an LLC to have an operating agreement. Of the states that do, some require the operating agreement be written while others permit oral agreements. No state requires an LLC to file an operating agreement with the Secretary of State; instead, the operating agreement is kept with other business records. No matter what state you’re in, however, it’s always a good idea to create a formal, written operating agreement—even for a single-member LLC.


Here’s why:

REASON 1 – Avoid State-Imposed Default Rules

Without an operating agreement in place, your LLC is bound by the default rules of your state. On the other hand, if you draft an operating agreement, you can customize a variety of provisions related to the management and ownership of your business. Most state laws governing LLCs allow the default rules to be overwritten in the LLC's operating agreement.

REASON 2 – Maintain Control

As the business gains momentum, you may want to hire a manager to take care of the day-to-day business operations so you can shift your attention to business-development opportunities. An operating agreement can define the manager role—designating their authority and compensation and what happens if the manager leaves or competes with the company.

REASON 3 – Keep Business and Personal Identities Separate

An operating agreement helps distinguish the business from the owner for liability purposes. A major benefit of an LLC is that it limits liability going both ways: the LLC protects a member’s assets from business liabilities, and protects the business assets from a member’s personal liabilities. Without an operating agreement in place, the business may look like a sole proprietorship. If a court doesn’t see your LLC as an entity separate from you, you could lose the liability protection that an LLC offers.

REASON 4 – Clarify Succession

An operating agreement can specify what happens if you die or become unable to run the business. Without this specific provision, your family may have a hard time continuing the business or winding it down.

REASON 5 – Scalability

Successful businesses grow. And growth requires capital. An operating agreement can specify how future investors will be treated. If you structure these terms in the operating agreement, the LLC will be better positioned in the investment negotiations.

We Can Help

An operating agreement serves an important role, even for a single-member LLC. The operating agreement puts you in the driver’s seat and enables the LLC to perform its main task—to limit liability. If you have an operating agreement in place, we’d be happy to review the agreement as well as your business needs to ensure the operating agreement and LLC are in sync. Or, if your LLC doesn’t have an operating agreement in place, we’ll work with you to craft an appropriate agreement.


Schedule a free virtual consultation with us today to learn more about our business services.


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THIS ARTICLE SHOULD NOT BE RELIED ON AS LEGAL OR TAX ADVICE (INFORMATIONAL PURPOSES ONLY)


Ryan E. Snow, JD/MBA, is a licensed attorney and experienced entrepreneur specializing in legal services for small to mid-sized businesses in all industries and at all stages of growth and development. He can be contacted via email at Ryan@RyanSnow.com or at his website www.ModernUtahLaw.com.


©2023 by Venture Counsel LC, all rights reserved.


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