5 Reasons Your Single-Member LLC Needs an Operating Agreement
An operating agreement is a contract that controls the operations of your limited liability company’s internal affairs. This includes the interactions between the members of the LLC, it managers, and the limited liability company itself. You may think that an operating agreement is not necessary for your single-member LLC. After all, do you really need a written agreement with yourself?
Is the Operating Agreement a Legal Requirement?
Colorado law doesn’t require an LLC to have an operating agreement. No state requires an LLC to file an operating agreement with the Secretary of State; instead, the operating agreement is kept with other business records. No matter what state you’re in, however, it’s always a good idea to create a formal, written operating agreement-even for a single-member LLC. 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. Colorado law governing LLCs allows the terms of the operating agreement to override most default rules. But if you do not have an operating agreement, the state will impose the default rules about governance and responsibilities in your limited liability company.
REASON 2 – Maintain Control
As the business gains momentum, you may want to hire one or more managers 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’s role, including how much the manager of the LLC can bind the company in a contract, what compensation the manager is entitled to, 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 helps protect a member from business liabilities and can protect the business assets from a member’s personal liabilities. Without an operating agreement in place that prohibits capital calls, the law may permit a mandatory capital call obligation if the LLC can’t pay its creditors, meaning that you may end up having to pay the LLC debts from your personal assets. In addition, without an operating agreement any creditor who can attach your LLC membership interest may be able to become the LLC manager and direct your company’s operations. Yikes!
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.
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.
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. i.e. limiting liability.
Whether your LLC has one member or several, if your Colorado limited liability company has 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 LLC doesn’t have an operating agreement in place, we’ll work with you to craft an appropriate agreement.