Why should a single-member LLC have an operating agreement?

Under current Indiana law, you can easily start up a limited liability company (LLC) with a credit card and an internet connection. After making a quick trip to the Indiana Secretary of State’s website, submitting articles of organization, and paying a fee you could have your very own LLC in about fifteen minutes. But what about creating an operating agreement for your LLC? Nothing about that process requires — or even mentions — an operating agreement. Strictly speaking, it’s not legally required, and if the LLC has only one member, an operating agreement may even seem pointless. Nonetheless, I advise all my clients with LLCs — even single-member LLCs — to have operating agreements.

The reason the Indiana Business Flexibility Act does not require an operating agreement is that it contains default rules that govern the LLC if there is no operating agreement (or if there is an operating agreement but it doesn’t address every issue). However, those default rules may or may not be what you want. Having an operating agreement created specifically for the needs and goals of your single-member LLC can help sort out which aspects of the Indiana Business Flexibility Act will apply to your LLC and which will be overridden.

A particular reason that I think single-member LLCs should have an operating agreement flows from the fact that I think most single-member LLCs (at least those owned by individuals rather than by another business entity) should be manager-managed rather than member-managed. Imagine you are the sole member of your own LLC, and it is member-managed. That means that you, and only you, have the authority to take actions on behalf of the LLC. Now imagine that you are in a serious accident and unable to manage your business for an extended period of time. There is no one who can step into your shoes and run the business in your absence.

However, imagine that you set the business up as a manager-managed LLC. You can name yourself as the manager and some other trusted person, such as your spouse, as the assistant manager who has the authority to step in and run the LLC if you are not able to. To do that, you’ll need an operating agreement that describes the authority of the other person to run the business when you can’t.

It’s also likely that third parties, such as banks and the IRS, will want to know various details about how the LLC is organized. An operating agreement includes information like who has the authority to sign contracts for the LLC, the LLC’s tax status, and other legally meaningful information. Being able to hand a third party a single document that clearly lays out all of the legally significant details about the LLC can save a lot of time and confusion for the member and the entities the LLC does business with.

If you’re considering forming a single-member LLC, please give some thought to creating an operating agreement. Not only would it be a handy resource for you as you learn the ins and outs of your LLC, it could also be useful for maintaining smoother interactions with third parties — and for allowing someone else to keep the business running if you’re not able to.

If you need assistance forming a single-member LLC or help drafting an operating agreement for your already established LLC, please feel free to contact Smith Rayl Law Office, LLC to schedule an initial consultation.

Michael Smith, Attorney at Law Emily Angel, Legal Assistant


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