Do I Need an Operating Agreement For My Single-Member LLC? (Hint: Yes, You Do!

Many people form limited liability companies (LLCs) to own and operate their businesses.

Much like corporations, LLCs offer limited liability protection without the requisite formalities of a corporation (for example, a board of directors, annual meetings, etc.).

The Operating Agreement is the primary document of an LLC, as it describes the framework of the business; financial and operational processes, including governing the internal operations of the business, including the relationship between the members (owners) and the duties of the owners to the business.  Essentially, it is the blueprint of the LLC.

Despite the importance of this document, I would guess that the vast majority of people who form an LLC do not bother drafting an Operating Agreement.

This is a dangerous thing to do (or, more appropriate, not do).

Every LLC needs an Operating Agreement.

Many single-member LLCs (LLCs with only one member) bypass drafting an LLC because the member presumes that they don’t need it.  Being the only member of the LLC, they rationalize that it is unnecessary to have a document that outlines the member’s duties, as they are the only member.  Additionally, being the only member, they can figure out whatever duties they wish to owe the business, and that there is no need to reduce it to a written document.

However, should a creditor (somebody who is owed money) of the LLC seek to hold the member personally liable for the debts of the LLC (a process called ‘piercing the corporate veil’), one of the first things they look for is whether the LLC operated as a mere ‘alter-ego’ of the member.  Was the LLC actually a sham, created solely to avoid personal liability or was it a legitimate separate legal entity?

If the LLC fails to have that basic operational document, the one upon which the rules and regulations of the LLC are described, that’s not going to bode well for the member in claiming that the LLC is not his/her alter-ego.  By simply drafting a well-written Operating Agreement, this becomes a non-issue.

I completely understand the need for a new business to save money.  My best advice is to do so by skimping on unnecessary business expenses.  Find a less- expensive supplier, cut back on unnecessary perks, turn off the lights when you go home at night.  However, I don’t believe that cutting costs by not drafting necessary LLC documents is a legitimate way to save money.  Should an issue occur (and it is likely inevitable that it will), the future cost to remedy the issue will far exceed the present cost of the documents.

If you are forming an LLC or thinking of forming an LLC, having an attorney available to review or draft your LLC documents will help to avoid conflicts and other problems down the road. Contact the Greenbaum Law Firm, P.A. to schedule a consultation today.

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Greenbaum Law Firm, P.A.

The Greenbaum Law Firm, P.A. is a boutique, client-centric law firm concentrating in the areas of business and corporate law, contracts and agreements, and real estate. Our unique approach to the practice of law consists of positioning our clients at the center of the legal practice and pursuing their objectives in the most efficient and transparent manner.

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