A limited liability company agreement is one of the most important documents for a single member LLC to adopt for his or her business. There are several reasons why and there is one important reason why not having this agreement can be disastrous.
A common question is whether a single member LLC really needs an operating agreement? After all, that one person will be the only person who can decide on business matters, receive profit and loss allocations and accept distributions of LLC assets.
BENEFITS OF A LIMITED LIABILITY COMPANY AGREEMENT TO A SINGLE MEMBER
The most common purposes of a limited liability company agreement include issues of control, finance, fiduciary duties that appear more relevant to a multi-member LLC. However, operating agreements can provide owners of a single member LLC the same benefits.
It is essential that a single member acknowledge that his or her limited liability company is a legal entity and business vehicle separate and apart from himself or herself.
While the LLC laws do not impose a lot of formalities for operating an LLC, the legal entity still needs a set of operating and governance rules. One of the biggest mistakes a single member can make is forming an LLC and then ignoring it and not providing it with the standard and typical structures and maintenance required to operate an LLC.
The limited liability company agreement is the tool used for the owner to determine which rules should apply to the operations of the business and the document serves as a user manual for the single owner to consult when maintaining the LLC and making LLC decisions.
BIGGEST REASON FOR A SINGLE MEMBER LLC TO ADOPT A LIMITED LIABILITY COMPANY AGREEMENT
Because a single member LLC has only one owner, it is uniquely susceptible to a challenge by third parties when it comes to the limited liability of the single owner.
Third parties will argue the classic alter ego theory that the veil of protection should be pierced and the single owner should be personally liable for a business obligation because, in essence, the single member is really the true business party running and owning the business that has caused some damage or liability.
Because of this higher vulnerability, it is essential that the single member do what he or she can to succeed in defending this challenge.
By adopting a limited liability company agreement, you are underscoring this challenge because the very existence of an operating agreement evidences the distinctness and legal separation between the single member and the LLC.
This document shows the legal agreements between the member and the LLC as two separate persons and it provides the legal entity itself with its own set of governance and operational rules. It is strong support to show that the single member does and has been recognizing its business as a separate person and this is the essential foundation for limited liability protection. LegalZoom vs Incfile
The good news is that adopting an agreement for a single member LLC is much simpler than for multi-member businesses. There are no conflicts or matters to negotiate among several members.
It really just involves the single person thinking through the best way to operate the LLC business based on what the business entails and what third parties the business will interact with.