A Single-Member LLC Operating Agreement serves as the backbone for businesses with a sole owner, providing a structured framework for purpose, finances, and operations. Also referred to as a sole-member LLC operating agreement, this document not only establishes limited liability but is crucial for legal and financial clarity. Let's delve into the essentials of a Single-Member LLC Operating Agreement and why it's a vital component of your business foundation.

Table of Contents

• What is a Single-Member LLC?
• Does a Single-Member LLC Need an Operating Agreement?
• Setting Up a Single-Member LLC
• What to Include in a Single-Member LLC Operating Agreement?
• How to Write a Single-Member LLC Operating Agreement
• Frequently Asked Questions
• Single-Member LLC Operating Agreement Sample

What is a Single-Member LLC?

A Single-Member LLC, often known as a sole-member LLC, is a limited liability company with a solitary owner. This structure safeguards the owner's assets from the company's debts, functioning as a distinct legal entity. Enjoying similar tax classifications as multi-member LLCs, a Single-Member LLC is classified by the IRS as a disregarded entity. This means the owner reports business profits and losses on their personal tax return, subject to self-employment taxes. Alternatively, it can opt for corporate tax status through an Entity Classification Election (Form 8832).

Single-Member LLC vs. Sole Proprietorship

Distinguishing between a Single-Member LLC and a sole proprietorship is crucial. While both are owned by one individual, the key disparities lie in legal separation and operational aspects. A Single-Member LLC offers the ability to hire employees, acts as a separate entity, and can create bank accounts. On the other hand, a sole proprietorship lacks legal separation, faces limitations in hiring employees, and requires the use of a DBA or personal name for banking.

Does a Single-Member LLC Need an Operating Agreement?

In certain states like California, New York, Missouri, Maine, and Delaware, an LLC operating agreement is mandatory for single-member LLCs. Even in states where it's not required, creating one is highly recommended. An operating agreement serves as proof of separation in legal matters, defines dissolution and succession plans, enhances credibility for investors, and allows you to set your own rules.

Setting Up a Single-Member LLC

Forming a Single-Member LLC involves several key steps:

1. Name your LLC: Adhere to naming conventions and check name availability online.
2. Choose a registered agent: Appoint someone responsible for legal documents.
3. File articles of incorporation: Pay a filing fee and submit documents to the Secretary of State.
4. Draft an operating agreement: Though not mandatory in all states, it's crucial for operation.
5. Obtain an EIN: While technically not required, it streamlines financial separation.
6. Apply for business licenses: Comply with state and city regulations.
7. Set up an LLC bank account: Keep personal and business assets separate.

What to Include in a Single-Member LLC Operating Agreement?

A well-structured operating agreement should encompass the following elements:

1. Date and location of LLC formation: Specify the agreement date and the state of LLC formation.
2. Company details and registered agent: Outline business specifics and registered agent information.
3. Management: Identify the sole member and clarify whether they will manage or appoint a non-member manager.
4. Capital contributions: Detail any contributions made to the business.
5. Payment: Define how the LLC will compensate the owner.
6. Dissolution and succession: Outline procedures in case of owner death or incapacitation.
7. Governing laws: Mention the state under which the LLC operates.
8. Signatures: Ensure the sole member signs the operating agreement, affirming its acceptance.

How to Write a Single-Member LLC Operating Agreement

The content should describe your business’s purpose, operations, and finances. If you’re serious about growing your single-member LLC, you should create a comprehensive operating agreement that includes the following:

Step 1 – State and Date

a) This is the state where the LLC was formed.

b) Date the agreement is being entered into.

An example of where to include the state and date in our single-member LLC operating agreement template.

Step 2 – Introductory Provisions

Provision A

List the legal name under which you will operate and file taxes. This may or may not be your name for marketing or other purposes.

However, this should be the name you used to file the LLC in your state legally.

Be aware that states have specific requirements for how you name your LLC. This varies by state, so be sure to check with your Secretary of State or the equivalent business formation office in your state for the naming requirements of your LLC.

Provision B

List the primary location where business is conducted. This will be the physical address that you used when you filed to register the LLC in your state.

If you do not have a physical address for operations, this will be the address you listed when you pointed to register your LLC with your state.

The physical address may be the same as your registered agent address, which you must provide if you need to receive service or official documents on behalf of the company.

Provision C

List the state or states where the LLC is registered and operating.

Provision D

The registered agent is the designated individual or company physically located within the state who can receive service of process or other correspondence on behalf of the LLC.

A member in the state can be appointed as a registered agent for the LLC.

Include the full physical address of the registered agent, where service of process or other legal or official correspondence can be delivered or served upon the company. This cannot be a PO Box.

Provision E

This is the date when the LLC officially begins operations. This may or may not be the same date as the date of this operating agreement.

Provision F 

This is the timeframe that the LLC will follow to establish an entire year. Most businesses follow the calendar year, which runs from January 1 through December 31; however, you can choose a different time frame as long as it is a full year.

For example, your fiscal year can run from April 1 through March 31.

An example of where to include introductory provisions in our single-member LLC operating agreement template.

Step 3 – Membership Interests and Management

a) List the full legal names of the sole member of the LLC. In an LLC, a member has ownership and voting rights within the company. Also, include the full physical address of the sole member.

b) This is the number of units the LLC may issue its members. It is common for a single-member LLC to give one class of membership units—for example, 100 units of regular units to the sole member of the LLC.

An example of where to include membership interests and management details in our template.

Step 6 – Capital Contributions

Outline capital contributions, including cash, property, and other assets you make to the business as the sole owner.

An example of where to outline capital contributions in our single-member LLC operating agreement template.

Step 7 – Payment

Describe how you will be compensated by the LLC, for example, by receiving a regular salary or periodic lump sum payments. Including this in your single-member LLC operating agreement demonstrates to tax agencies that the business is separate from you.

An example of where to detail payment information is in our single-member LLC operating agreement template.

Step 8 – Dissolution & Succession

Provide a plan for your business management and assets if you die or become incapacitated. If you want to name a successor, use this section.

Step 9 – Governing Laws

a) This is the state in which the LLC was formed.

Where to include miscellaneous details in our template.

Step 10 – Signature

Sign the SMLLC operating agreement as the sole member. Since you’re the only one signing the document, it’s recommended that you mark it in the presence of a notary public.

An example of where to include signatures in our template.

Crafting a robust Single-Member LLC Operating Agreement is a strategic move for business owners. It not only safeguards your assets but also establishes clarity in operations and enhances credibility. Whether you're navigating legal requirements or attracting investors, a well-drafted operating agreement is an invaluable asset for your single-member LLC journey.

Frequently Asked Questions

How is a Single-Member LLC Taxed According to the IRS?

The IRS classifies a Single-Member LLC as a disregarded entity. This means the business doesn't file a separate tax return, and the owner reports profits and losses on their personal tax return, subject to self-employment taxes.

Is an Operating Agreement Mandatory for Single-Member LLCs?

In some states like California, New York, Missouri, Maine, and Delaware, an LLC operating agreement is mandatory. Even where not required, it is highly recommended to establish legal clarity, define dissolution/succession, and enhance credibility.

Are Single-Member LLCs Required to Have an EIN?

Are Single-Member LLCs Required to Have an EIN?

Single-Member LLC Operating Agreement Sample