Yes, your single-member LLC still needs an operating agreement

Bravo! You took the step of turning your sole proprietorship into a limited liability corporation (LLC) because you understand the potential benefits. But since you’re only one person, an operating agreement seems like overkill, right?

It’s not. Your operating agreement is an essential guideline your business needs to have.

What value does an operating agreement have for a single-member LLC?

There are four main reasons you need an operating agreement even if you’re running the business solo:

  • It coherently describes your operations. It sets the terms for how money is contributed to the LLC and how proceeds are distributed. It’s also part of your records, should you ever undergo an audit.
  • It helps separate the business from you. One of the primary purposes of an LLC is separating business liability from personal liability. Without an operating agreement, you may have trouble maintaining that distinction.
  • It circumvents the state’s default rules. When your LLC has no operating agreement, the state’s default rules kick in. You may find it unpalatable to have the state govern the disposition of your business assets according to general terms that may not suit your goals.
  • It creates a succession plan. What happens to your business if you’re briefly incapacitated? Without an operating agreement that specifies, nobody can easily step into your place and keep things running in your absence.

In short, your operating agreement is your plan for the future. Even if it doesn’t seem to make much impact on your business today, you need it.

The ins and outs of business formation can be complicated and overwhelming, but you don’t have to handle it all on your own. Talk to an experienced business law attorney about your entrepreneurial goals and learn how they can help.