Single Member LLC Operating Agreement for California

What Is a Single-Member LLC Operating Agreement?

A single-member limited liability company (LLC) operating agreement is a document prepared when a business is created that lays out how the business will be operated. This document should be created with the help of a lawyer.

The following definitions are important to understanding single-member LLC operating agreements:

• Single-member LLC: A business with one owner or a company owned by spouses. The single member might also be an entity such as a trust, partnership, corporation, or another LLC.
• Limited liability company: A form of business organization that protects the members or owners from liability. It combines aspects of a corporation and a partnership. An LLC might be managed by its owner or by managers who aren't owners.
• Operating agreement: A document that describes the business's operations and the agreement between the members of the business. An operating agreement isn't required for an LLC, but all LLCs should have one.

An operating agreement is similar to a corporation's by-laws, which guide the board of directors in decision making, or to a partnership agreement, which guides partnerships in making good decisions for their business.

By-laws are required for a corporation, but similar to an LLC's operating agreement, a partnership agreement isn't required. Because LLCs and partnerships function in similar ways, operating agreements and partnership agreements will be similar.

Reasons Your Single-Member LLC Needs an Operating Agreement

The importance of a multi-member LLC operating agreement may be more obvious, but that doesn't mean that a single-member LLC operating agreement is any less important.

Multi-member LLC operating agreements are designed to solve problems and resolve disputes that are between the owner or members of the multi-member LLC. Although you won't face the same issues with a single-member LLC, there are still several reasons to set up an operating agreement.

1. To Describe the Single-Member LLC

A single-member LLC operating agreement describes how the single-member LLC operates. It also explains the formation of the business and the procedures followed, as well as how LLC funds are distributed to the owner. This ensures that appropriate records are being kept.

2. To Separate the Owner From the Business

A single-member LLC operating agreement lays out the business's financial affairs and operation policies. This helps to separate the business's affairs from the affairs of the single owner, which is beneficial for tax purposes.

Making the LLC a clearly defined independent entity helps protect the owner's personal assets. This separation is crucial if there is ever a liability issue.

3. To Clarify Succession

What happens if the owner dies or can't run the business? A single-member LLC operating agreement lays out what happens in the event that a succession is needed.

Without a plan for succession, it might be difficult for your family or business members to continue the business or to dissolve the business without a lengthy legal battle.

The operating agreement should also lay out who will manage and run the business if the owner isn't able to do so anymore.

4. To Prevent "Default Rules"

Without an operating agreement, a single-member LLC is subject to a state's "default rules." The state is the one in which an LLC is organized. Most business owners don't want the state to tell them how to run their business and spend the assets, and a single-member LLC operating agreement lets the business make the decision.

The operating agreement doesn't have to be filed with the state, but it should be kept easily accessible at your business's official location.

5. To Inform Lenders

A single-member LLC operating agreement is also beneficial for your LLC as it details information about how your business will run that can be given to potential lenders or funders.

Someone who is potentially going to give your business money wants to see how that money will be used and know that your business is organized before investing. A single-member LLC operating agreement will be one of the things potential lenders will look at.

The Elements of a Single-Member LLC Operating Agreement

Just as each business is unique, each operating agreement is unique. The owner of the single-member LLC can write the operating agreement in any way they want. However, there are a few elements that should be included in every single-member LLC operating agreement. The basic elements should cover how you're organizing and running your business. Those elements are as follows:

• Organization and ownership: Since you are the only owner of your business, this is the easy part. Make clear that as the sole owner, you have all of the voting rights. Additionally, this section should be clear that you as the owner have limited liabilities for the debts of the LLC.

• Management: This section is particularly important for a single-member LLC that is managed by someone other than the owner. Clearly lay out the powers, rights, and responsibilities of the manager and state how the manager will be chosen or promoted. You can also state who the interim manager will be if the manager becomes unavailable.

  This section should include a statement limiting liability for the managers. The statement should explain that the manager will not be held personally responsible for or be expected to pay off the business's debts, obligations, or other liabilities.

• Taxes and financial matters: Even if they choose to be treated as a pass-through entity, LLCs are required to file an annual tax return. In contrast, a single-member LLC may be treated as disregarded entities. This makes a single-member LLC exempt from filing a federal tax return. This saves the single-member LLC time and money. It might also allow the single-member LLC to take tax benefits that aren't generally available to LLCs. Some states require single-member LLCs to file state tax returns, even if they're exempt from filing federal tax returns.

• Contribution and distribution of capital: The single-member LLC operating agreement should make clear the capital contributions that the single member makes. If the single member contributes something other than cash, the value of that contribution should be made clear.

  This section should also describe how the single-member LLC will distribute losses and profits to the single member. These profits and losses must be reported on the single member's tax return.

• Transferring shares: This element of a single-member LLC operating agreement is where the owner can state how business shares can be shared in whole or part. If this isn't expressly stated, the default will be whatever state laws dictate.

• Dissolution: This is the clause that puts a contingency plan in place in case you as the owner are unable to continue the business. This will lay out how the LLC should be dissolved, if that's ever necessary. Although this is likely the furthest thing in your mind when beginning your LLC, it's good to have a provision in place for every possibility.

• Trigger events: No one wants to think of their own death or bankruptcy, but when creating a single-member LLC operating agreement, it's necessary. This provision puts into place what should happen to the single-member LLC in the case of the death or bankruptcy of the owner. Without this provision, the single-member LLC might be forced to dissolve when the owner dies, even if there is someone willing to step up as manager or owner.

• General or miscellaneous provisions: The single-member LLC operating agreement should set the basic rules for the management and operation of the LLC. This might include rules on holding meetings and taking votes. Though you as the owner and single member might be the only one at the meetings, it's a good idea to have guidelines.

• Signatures: Any agreement needs a signature. Even if you're the sole member, be sure to sign the document, make copies, and create a digital copy or scan. Keep the copies in a few different places so that you're guaranteed to have one when you need it.

Each company that creates a single-member LLC operating agreement will structure it slightly differently and include different information. The same principle applies to different lawyers whom you might ask to draw up a single-member LLC operating agreement. There's no one-size-fits-all draft when it comes to this type of document.

The process of creating an operating agreement will help you as the owner to see the document and the business plan through someone else's eyes. Creating this document might also make clear issues that you have with your business plan. This is an opportunity to fix those problems before they become any bigger.

Setting Up a Single-Member LLC

It's imperative that when setting up a single-member LLC, an operating agreement is drafted, checked by a lawyer, and signed by the single-member of the LLC.

Keep in mind that the laws governing LLCs differ from state to state. Some states - such as California, Georgia, Florida, Utah, New York, Oregon, Colorado, and Kansas - offer minimal protection to single-member LLCs, while others offer a lot of protection. When setting up your single-member LLC, carefully consider in which state you want to form your business. Your decision will affect the way your single-member LLC is treated.

You should also review case law to determine the potential pitfalls of a single-member LLC. For instance, the courts in two states that are typically favorable to single-member LLCs, Nevada and Wyoming, have recently ruled against single-member LLCs in specific situations. In the September 2014 case of In re Cleveland, the U.S. District Court in Nevada decided that a bankruptcy trustee could manage the LLC in place of the single owner. Two months later in the Greenhunter case, the Wyoming Supreme Court held a Texas company that was the single member of a Wyoming LLC liable for the LLC's debts.

Benefits of a Single-Member LLC Operating Agreement

A single-member LLC operating agreement is your protection as the owner against lawsuits and potential liability. Here are a few ways that the single-member LLC operating agreement benefits the single-member LLC.

1. You Can Set Your Own Rules

Without a single-member LLC operating agreement, your company will be bound by the default rules of your state if any litigation or liability is brought against your company.

Many states do not have laws that support or benefit a single-member LLC in the event of litigation. By creating an operating agreement, you protect your business from the default rules of your state.

2. You Can Protect Your Personal Assets

An operating agreement creates separation between your single-member LLC as a business entity and yourself as a private individual. That way if a lawsuit is ever brought against the business, your personal assets - such as your investments, home, and car - will not be affected.

3. You Can Facilitate Future Growth

A successful business is one that has the potential to grow and reaches that potential. A single-member LLC operating agreement puts down the rules for how investors will be treated, how investments will be repaid, and whether the investors will have voting rights as the business grows. This gives the owner the ability to lay out exactly how the business will be run in the future and as it grows.

4. You Can Control Day-to-Day Operations

A single-member LLC operating agreement can also help the owner to lay out how the business will be run day-to-day, explaining the responsibilities and powers that a manager can have.

5. You Can Limit the Powers of a Successor-Manager

A single-member LLC operating agreement can also limit the powers that are given to the chosen successor manager. The single-member LLC operating agreement can fully lay out any plan that the single-member deems necessary in the event that management of the company must change hands.

FAQs

• Why should I set my business up as a single-member LLC versus a sole proprietorship or S corporation?

It might seem easier as a business owner to choose a sole proprietorship or an S corporation, but there are some benefits of an LLC that aren't available to those types of businesses.

For example, only an LLC provides the level of flexibility that an owner might need, including the ability to name a successor. In a corporation, the successor is named by the Board of Directors. In the case of a sole proprietorship, there may be no one left to make the decision as the sole proprietor is often the sole director, sole officer, and sole shareholder.

• Is a single-member LLC operating agreement really necessary?

Yes! Just because you're the only member of a single-member LLC doesn't mean that rules and plans don't need to be written down.

A single-member LLC operating agreement is important so that you can share the business plan with potential investors and plan for any problems, such as the death of the owner or bankruptcy. It is also necessary to protect your personal assets in the event of any liability lawsuits.

A single-member LLC operating agreement can be as specific or as general as you need for your business. Contact one of the highly-trained lawyers at UpCounsel for consultation on what your single-member LLC operating agreement should look like.