There’s a lot that goes into starting your own business, and you need to be sure you are covered legally. This is why setting up a Single Member LLC Operating Agreement is essential. This document will help limit liability for a business being run as a sole proprietorship.
Simply put, an operating agreement is a document that LLC’s use to give a clear outline and description of a business’ functional and financial decisions, such as how you pay yourself, and separating your finances from the business’. It’s a good idea for a sole proprietorship to set up a Single Member LLC Operating Agreement because it will draw a line between the owner and the business that is useful for tax and liability purposes.
It works to clarify succession in the business should you be unable to run it, making it easier for your family to step in and continue or close the transaction. It also works to help you avoid state default rules that tell a business how they may dispose of their business assets. It’s a way to protect yourself and your business.
You should have an operating agreement if :
- You’re an SMLLC that will be seeking future funding
- The state you operate in requires it
- There is a need to separate yourself from the business
- You wish to have an outline of your business’ operation for investors.
How to Create a Single Member LLC Operating Agreement?
Some key areas need to be part of your operating agreement. It will require the necessary details of your business to start. Other things that you will need to take into consideration are:
Most U.S states will require you to have a registered agent, which is someone you have designated to be the recipient of official documents on your businesses’ behalf. It’s essential to check if your state requires a registered agent. Otherwise, you may incur penalties or, even worse, be prohibited from doing any business.
Your Business’s Purpose
Outlining the purpose of your business is another critical factor to have in your operating agreement. You may have already written this up for a business plan.
Two key financial aspects to include in your operating agreement are how much financially you will putting into your business and how you are going to be paying yourself. The first is essential if you are going to be looking for people to invest in your company, as well as when it comes time to file taxes.
Getting paid will also be necessary for personal tax purposes to separate your business taxes from your taxes. Defining how you will be paying yourself is essential. For example, are you going to assign yourself a monthly or weekly salary, or do you plan on taking a lump sum? Will that lump sum is once a year or periodically?
Dissolving Your Business
You should also have a plan in place should you choose to close, or dissolve the business. For this part, layout what you want to be done with your business if you should pass away or if you are not able to run it any longer.
You may be the sole owner of your business, but you could find the need to appoint other people, such as a manager, to help run things. Make sure you list their responsibilities and duties.
If you need help creating an operating agreement for your LLC, you can use one of our free templates and samples to get you started. They will give you a good idea of what to include and help you to understand the process better.
- MS Word
Frequently Asked Questions
You may need to provide your operating agreement if you are applying for business financing from a lender, purchasing real estate for the business, a lawyer, potential partners or investors of the company, or for financial assistance services.
Some states will require you to have an operating agreement, and in other countries, it won’t be a legal requirement. Either way, it’s beneficial for you to have one in place. Are available in all 50 states.
It’s beneficial to have an updated Single Member LLC Operating Agreement in place for many reasons, and it gives you peace of mind as a single business owner in the long run. If you have a more complex business, you may need the advice of an attorney to get you started.