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Learn what should be covered in a typical operating agreement for a single-member LLC.Protect Your BusinessCreate your LLC with NoloWhen forming any limited liability company (LLC), including any single-member LLC (SMLLC), most people prepare at least two key documents: the articles of organization (or equivalent document such as certificate of organization) and an operating agreement. The articles of organization are filed with the state, tell the state that the new SMLLC exists, put the public on notice of the SMLLC's existence, and let people know how to contact the business. The operating agreement, meanwhile, lays out the most important rules for how an SMLLC will be run. Unlike the articles of organization, an operating agreement generally is not required in order to form an SMLLC, nor is it filed with the state. Instead, an operating agreement is optional—though recommended. If you choose to have one, you'll keep it on file at your business's official location. Any good operating agreement is tailored to fit the specific needs of a particular LLC. For this reason, the length and contents of different companies' operating agreements can vary widely. However, many operating agreements contain information in the following areas:
This particular list necessarily is somewhat arbitrary; different people (lawyers and others) will include different information, and also will organize the same basic information in different ways. However, an SMLLC operating agreement typically is made between the SMLLC and its sole member (though including the SMLLC as a party to the agreement is not a strict legal requirement); and every properly-drafted SMLLC operating agreement will have a section (whether it's headed "Organization" or otherwise) that contains the same basic information as the articles of organization. A section on management is particularly important for manager-managed SMLLCs. The section can be used to clearly define the powers, rights, and responsibilities of the manager, as well as how the manager is appointed. It's also one place where, if you, the owner, will serve as the initial manager, you can state who will serve as a successor manager in case you become unavailable. Second, both a section on management and a section on membership should contain explicit statements of limited liability; in other words, statements that, respectively, managers and members are not liable for debts, obligations, or liabilities of the company. Some of the other areas (tax and financial matters, capital contributions and distributions, dissolution) are covered in other articles in the SMLLC section of this website. The importance of an operating agreement may be more obvious in the context of multi-member LLCs as opposed to SMLLCs. For multi-member LLCs, a written agreement can be crucial to resolving disputes among members. However, for SMLLCs, too, an operating agreement is recommended. An SMLLC operating agreement offers various benefits, such as:
Most lawyers prepare operating agreements when they form SMLLCs, and many banks and other businesses that you want to work with will expect that you'll have this document. Additional Information For fuller information on how to start and run an SMLLC, pick up a copy of Nolo's Guide to Single-Member LLCs: How to Form and Run Your Single-Member Limited Liability Company by David M. Steingold (Nolo). A single-member LLC operating agreement is a form used for recording the details of a newly-formed limited liability company with one (1) member. From how it’s financed to the rules for adding a new member, the form contains a number of fundamental provisions that outline the governance of the organization. Once completed, the form is retained by the entity/owner; operating agreements do not need to be filed with the secretary of state. By State
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What is a Single-Member LLC? A single-member LLC is a type of business entity that is a common alternative to a sole-proprietorship. A single-member LLC provides several benefits to its owner, mainly that the owner is a separate entity to that of the business itself (shielding them from most liability). Come tax time, the entity is known as a “disregarded entity.” This means that the IRS “ignores” the company itself, requiring the LLC’s owner to pass the entity’s income and expenses through their own personal tax return, in the form of a Schedule C. How to Start a Single-Member LLCThe process for starting a single-member LLC is very similar to that of a multi-member LLC. The process may vary from state to state, but generally consists of the following steps: 1. Determine the Entity’s NameThe first step in forming an LLC is to name it. The owner can utilize their state’s entity search to find names that suit their business. The name can be virtually anything, as long as it is not prohibited by state law. Most state statutes require that entities put “LLC,” “L.L.C.,” “Ltd. Liability Co.,” or other similar words/abbreviations at the end of the company name. If the owner isn’t ready to file their new entity but they found the perfect name, they can reserve the name (typically for a fee). 2. Select a Registered AgentThe registered agent can be almost any person or entity, as long as they live in the state in which the LLC is filed, they’re available during normal business hours, and they’re at least 18 (applies only to individuals). LLC members commonly opt to nominate a registered agent other than themselves as it gives them a means of choosing a person that will always be present to receive lawsuits, documents, and other important communications. 3. Prepare the Articles of OrganizationThe Articles of Organization (goes by different names depending on the state) is what must be filed with the state in order for them to recognize that the LLC is real and valid. This can often be filed online for a fee. 4. Create the LLC Operating AgreementWhile rarely a state requirement, this step is one of the most important for ensuring the owner properly outlines their purpose, rules of governance, and other important factors of an LLC. Some of the topics covered in the operating agreement include profits/losses, distributions, new member additions, compensation (salaries), management, and much more. 5. Apply for a Tax ID/EINThis step is required for entities that intend to hire employees, open a business bank account, and more. Known as an “Employer Identification Number” an EIN is a completely unique designator given to a business. It is commonly compared to a person’s social security number (SSN). One can be obtained relatively easily through the IRS website. Single-Member LLC vs. Sole ProprietorWhile both sole proprietorships and LLCs have a single owner and are great options for those looking to open a small business, they differ in several major ways. Taxes In both an LLC and a sole proprietorship, taxes pass through the entity straight to the owner of the business, requiring them to show any income tax as an attachment to their personal tax return with a Schedule C tax form. However, unlike sole proprietorships, an LLC can opt for different tax treatments, allowing them to be taxed as a C or S corporation (as long as they meet all necessary requirements). Liability One of the most important differences between single-member LLCs and sole proprietorships is that the latter has no legal separation between the business and the person that owns it. Should the entity face a lawsuit, the owner is on the line for paying off any judgments. Because an LLC is a separate legal entity, it acts as a “shield” for the owner, protecting them from having to pay debts and lawsuits out of their own pocket. However, the protections an LLC offers only work if the owner is running their entity in full compliance with the law AND they don’t mix business and personal expenses. Regulations / Compliance Sole proprietorships may have the advantage over LLCs in that there are few restrictions placed on the owner (due to them being a single entity in the eyes of the state). The owner of a single-member LLC needs to file an annual report with the state, keep all business expenses separate, as well as abide by state-specific restrictions regarding operation. Does a single member LLC need an operating agreement in California?California does not require an SMLLC to have an operating agreement. However, even though an SMLLC has just one member, an operating agreement is highly recommended. An SMLLC operating agreement does not need to be filed with the state.
Does a single member LLC need an operating agreement in Illinois?Under the Illinois Limited Liability Company Act (LLCA) (805 ILCS 180/1-1 et seq.), an LLC is not required to have an operating agreement (805 ILCS 180/15-5(a)). However, a written operating agreement may help minimize disputes among the members regarding the terms of their agreement.
Does a single member LLC need an operating agreement in NY?The members of an LLC are required to adopt a written Operating Agreement. See Section 417 of the Limited Liability Company Law. The Operating Agreement may be entered into before, at the time of, or within 90 days after the filing of the Articles of Organization.
Does TN require an operating agreement for LLC?Is an Operating Agreement REQUIRED in Tennessee? No — LLCs in Tennessee are not legally required to adopt an operating agreement.
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Simple operating agreement for single member llc
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