If you're forming an LLC on your own, an operating agreement may seem unnecessary. Who signs a contract with themselves? But actually, whether you are forming an LLC on your own or with several other people, it is important to have an operating agreement that lays out all of the rules for the company to follow.
Why you need an operating agreement
Even though you aren't creating a contract with someone else, your LLC operating agreement allows you to get organized, plan, and write down all of your decisions for the company. This document is useful if you will be seeking funding because you can give it to potential lenders to show your business's organization and plan.
It also can be helpful for legal and financial purposes, showing the capital contributions, distribution rules, and decision-making authority.
Creating an SMLLC operating agreement provides evidence of separation between your personal affairs and your business affairs, so it will be clear that the LLC is a separate entity and your personal assets can be protected.
If you will be managing your SMLLC yourself, the operating agreement spells out who will take over management if you are not able to continue to do so. Additionally, creating an operating agreement for LLC allows you to put your own rules into place for how you will run your company, which will supersede those spelled out in your state LLC statutes.
Writing your operating agreement
You have complete freedom to write your limited liability company operating agreement any way you want to, but if you plan on submitting it to lenders, you'll want to stick to a traditional layout.
Basically you want the operating agreement for single-member LLC to cover the basics of how you are organizing and running your business. It should address the following general areas:
- Ownership. Since you are the sole owner and member of your SMLLC, this part is easy. You'll want to specify that you as the sole owner will have all the voting rights. This section should also make it clear that you have limited liability for the debts and liabilities of the LLC.
- Management. In this section, you state the responsibilities you will have as the sole manager or the responsibilities you are delegating to managers you are hiring. If you intend to be the sole manager of the LLC, state that, and also choose a successor manager to take your place should you die or become disabled. If you plan to hire managers to run the LLC, or to work with you to run it, then explain those relationships.
- Contributions and distributions. Your limited liability company operating agreement should discuss the capital contributions you as the single-member are making. If you are contributing something other than cash, you'll want to specify its value. This section should also address how you will be distributing losses and profits to yourself (which you will report on your personal tax return).
- General rules. The operating agreement for a single-member LLC also should set out the basic rules for the management of the LLC, including rules about holding meetings and taking votes. Even though you'll be the only one in attendance, it is a good idea to set out these guidelines.
- Dissolution. Although it's the farthest thing from your mind right now, creating a plan for how you will dissolve the LLC, should that time come, is a good idea and will provide a roadmap to follow to close the company, should that become necessary.
- Signature. The operating agreement should be signed by you as the sole member. Keep it in a safe place and make a few copies.
Creating an operating agreement for your SMLLC can force you to see your plans for your company through someone else's eyes and to make any necessary adjustments. Having your plan in writing can serve as a reminder for staying on track when things get hectic.