When forming an LLC, you should also include an operating agreement. An operating agreement is a contract that controls your LLC's operations as well as member interaction with each other and with the LLC. Operating agreements apply to all LLCs - whether single-member or multi-member LLCs. Some may think that an operating agreement is unnecessary for a single-member LLC.
Is the Operating Agreement a Legal Requirement?
Most states don't require an LLC to have an operating agreement. Of the states that do, some require the operating agreement be written while others permit oral agreements. In North Carolina, the operating agreement can be written, oral or a combination of the two. The operating agreement is not filed with Secretary of State; instead, it is kept with other business records. Whether you have a single-member or multi-member LLC, it is always a good idea to draft a written operating agreement. Single-member LLC should also take operating agreements as important documents. Here's why:
REASON 1 – Avoid State-Imposed Default Rules
Without an operating agreement in place, your LLC is bound by the default rules of your state. Most state laws governing LLCs allow the default rules to be overwritten in the LLC's operating agreement. In North Carolina, state law demands the LLC's managers must manage and conduct the LLC's business “in accordance with the operating agreement.” Your operating agreement would define how you manage and conduct your LLC.
REASON 2 – Maintain Control
As the business gains momentum, you may want to hire a manager to take care of the day-to-day business operations so you can shift your attention to business-development opportunities. An operating agreement can define the manager role—designating the authority, compensation and what happens if the manager leaves or competes with the company.
REASON 3 – Keep Business and Personal Identities Separate
An operating agreement helps distinguish the business from the owner for liability purposes. A major benefit of an LLC is that it limits liability going both ways: the LLC protects a member from business liabilities and the business assets from a member's personal liabilities. Without the formalities of an operating agreement in place, the business may look like a sole proprietorship. If a court doesn't see your LLC as an entity separate from you, you could lose the liability protection that an LLC offers. LLCs are have less requirements for protection than other corporate business entity structures, but the operating agreement's formality for the LLC further supports that the LLC is not an “alter ego.”
REASON 4 – Clarify Succession
An operating agreement can specify what happens if you die or become unable to run the business. Without this specific provision, your family may have a hard time continuing the business or winding it down. Business succession planning is important, and the operating agreement can be the first steps you take for succession planning.
REASON 5 – Scalability
Successful businesses grow. And growth requires capital. An operating agreement can specify how future investors will be treated. If you structure these terms in the operating agreement, the LLC will be better positioned in the investment negotiations. Moreover, some banks require an operating agreement when opening a bank account.
Let's Continue this Conversation
An operating agreement serves an important role, even for a single-member LLC. The operating agreement puts you in the driver's seat and enables the LLC to perform its main task—to limit liability and protect your personal assets.
If you have an operating agreement in place, we'd be happy to review the agreement as well as your business needs to ensure the operating agreement and LLC are in sync. Or, if your single-member LLC doesn't have an operating agreement in place, we'll work with you to craft an appropriate agreement. Call (704) 230-0466 or CLICK HERE to schedule a meeting with an experienced business attorney who can help you. The Brewington Law Firm, PLLC meets by telephone conference, in office or web conference (Zoom/Google Duo/Microsoft Teams).