A single-member LLC operating agreement outlines the purpose, finances, and operations of an LLC with one owner. This document helps establish limited liability — the separation between the business and the owner’s assets.
A single member LLC operating agreement can also be called a sole-member LLC operating agreement.
Since there is only one signatory, it’s recommended that the owner sign the operating agreement in the presence of a notary public to ensure it’s time-stamped.
What is a Single-member LLC?
A single-member LLC (SMLLC), also known as a sole-member LLC, is a limited liability company (LLC) with one owner (member). It protects its owner’s assets from the company’s debts and obligations as a separate entity.
A single member limited liability company benefits from similar LLC tax classifications as a multi-member LLC.
According to the Internal Revenue Service (IRS), a single-member limited liability company is classified as a disregarded entity, meaning it doesn’t file a tax return on behalf of the business.
The owner’s federal tax return records the business’s profits and losses. The earnings are subject to self-employment taxes using Schedule C in the same manner as a sole proprietorship.
Alternatively, a single-member operating agreement can be taxed as a corporation by filing an Entity Classification Election (Form 8832).
It’s important to note that all states charge an annual fee for limited liability companies. For example, any LLC doing business or organized in California must pay $800 annually.
Single-Member LLC vs. Sole Proprietorship
A sole proprietorship and a single-member LLC are both owned by one person.
However, unlike a limited liability company, a sole proprietorship is not legally separated from its owner. This means the owner is still liable for the business’s debts, losses, and legal obligations.
- Can hire employees
- Need to file articles of incorporation
- Acts as a separate entity
- Can create bank accounts
- Can’t hire employees without an EIN
- Not a separate entity
- Needs to use a DBA (Doing Business As) or personal name to create bank accounts
- Can’t elect corporate tax status
Do Single-Member LLCs Need an Operating Agreement?
Single-member limited liability companies registered in California, New York, Missouri, Maine, and Delaware require an operating agreement.
While not needed for the remaining states, creating an operating agreement when establishing your SMLLC is highly advised.
Should you Create a Single-Member LLC Operating Agreement?
You may not need an agreement if you’re forming a limited liability company. However, it’s highly recommended that you create one for the following reasons:
- Prove separation: An operating agreement acts as evidence to courts that your limited liability company is a separate entity removed from your assets. This is important if you or your LLC is sued based on your LLC business, and the lawsuit is attempting to reach your assets.
- Define dissolution/succession: This allows you to outline how assets and liabilities should be distributed if the LLC must dissolve (although liabilities are always paid first) and appoint someone to manage the LLC in the event of your death or incapacitation.
- Increase credibility: Investors will evaluate your LLC operating agreement before doing business with your company. Banks will often require one to open a bank account.
- Determine your own rules: Without an operating agreement, your LLC is subject to the rules governing LLCs in the state where its articles of organization are filed.
Setting Up a Single-Member LLC
Forming a single-member LLC is very similar to starting a multi-member LLC. The steps to creating a single member operating agreement are as follows:
- Name your LLC: You need to follow some basic naming conventions when naming your LLC and ensure that the name is unique. Some states allow you to check online if an LLC name is available.
- Choose a registered agent: Appoint a registered agent for your LLC. They are responsible for receiving and filing legal documents. Your registered agent must reside in the same state where your LLC is registered.
- File articles of incorporation: To form an LLC, you must file your LLC’s articles of incorporation. You’ll need to pay a filing fee, which varies from state to state, and submit the documents to the Secretary of State’s office.
- Draft a single-member LLC operating agreement: Although not required by most states, an LLC operating agreement is essential to LLC formation. It sets out how the limited liability company will operate.
- Obtain an Employer Identification Number (EIN): Unlike multi-member LLCs, single-member LLCs technically do not need an EIN. However, an EIN makes it easier to separate personal and business finances, and opening a business bank account for your LLC may be required. You can obtain an EIN online from the IRS.
- Apply for business licenses: Depending on the state where your LLC will be formed and the cities where you will conduct business, you may need to apply for a business license before your business can begin operating.
- Set up an LLC bank account: Open an LLC account to separate your assets from your business assets.
What to Include in a Single-Member LLC Operating Agreement?
There are several elements that a single-member LLC operating agreement must include:
- Date and location of incorporation: Include the date the operating agreement is being entered and the state where the LLC was formed.
- Company details and registered agent: Detail the name, place of business, purpose, and name and address of the registered agent.
- Management: The name of the owner Usually, single-member LLCs choose to be managed by the sole member, but not always. A non-member manager can also be appointed.
- Capital contributions: Outline any capital contributions you make to the business.
- Payment: How will the LLC compensate you?
- Dissolution and succession: What will happen to the business if you die or become incapacitated?
- Governing laws: Include the state in which the LLC was formed.
- Signatures: As the sole owner, sign the operating agreement.
How to Write a Single-Member LLC Operating Agreement
The content should describe your business’s purpose, operations, and finances. If you’re serious about growing your single-member LLC, you should create a comprehensive operating agreement that includes the following:
Step 1 – State and Date
a) This is the state where the LLC was formed.
b) Date the agreement is being entered into.
Step 2 – Introductory Provisions
List the legal name under which you will operate and file taxes. This may or may not be your name for marketing or other purposes.
However, this should be the name you used to file the LLC in your state legally.
Be aware that states have specific requirements for how you name your LLC. This varies by state, so be sure to check with your Secretary of State or the equivalent business formation office in your state for the naming requirements of your LLC.
List the primary location where business is conducted. This will be the physical address that you used when you filed to register the LLC in your state.
If you do not have a physical address for operations, this will be the address you listed when you pointed to register your LLC with your state.
The physical address may be the same as your registered agent address, which you must provide if you need to receive service or official documents on behalf of the company.
List the state or states where the LLC is registered and operating.
The registered agent is the designated individual or company physically located within the state that can receive service of process or other correspondence on behalf of the LLC.
A member in the state can be appointed as a registered agent for the LLC.
Include the full physical address of the registered agent, where service of process or other legal or official correspondence can be delivered or served upon the company. This cannot be a PO Box.
This is the date when the LLC officially begins operations. This may or may not be the same date as the date of this operating agreement.
This is the timeframe that the LLC will follow to establish an entire year. Most businesses follow the calendar year, which runs from January 1 through December 31; however, you can choose a different time frame as long as it is a full year.
For example, your fiscal year can run from April 1 through March 31.
Step 3 – Membership Interests and Management
a) List the full legal names of the sole member of the LLC. In an LLC, a member has ownership and voting rights within the company. Also, include the full physical address.
b) This is the number of units the LLC may issue its members. It is common for a single-member LLC to give one class of membership units—for example, 100 units of regular units to the sole member of the LLC.
Step 6 – Capital Contributions
Outline capital contributions, including cash, property, and other assets you make to the business as the sole owner.
Step 7 – Payment
Describe how you will be compensated by the LLC, for example, by receiving a regular salary or periodic lump sum payments. Including this in your single-member LLC operating agreement demonstrates to tax agencies that the business is separate from you.
Step 8 – Dissolution & Succession
Provide a plan for your business management and assets if you die or become incapacitated. If you want to name a successor, use this section.
Step 9 – Governing Laws
a) This is the state in which the LLC was formed.
Step 10 – Signature
Sign the SMLLC operating agreement – since you’re the only one signing the document, it’s recommended that you mark it in the presence of a notary public.
Single-Member LLC Operating Agreement Sample
Below is a sample of an operating agreement for a single-member LLC.
Click the buttons below the document to view a completed version of the contract or download a blank template.
Frequently Asked Questions
Is an LLC required to have an operating agreement?
Whether you require an operating agreement for your LLC depends on the state in which you want to form the LLC.
What is the difference between an LLC and a single-member LLC?
The critical difference between a single-member LLC and a multi-member LLC is the number of members.
A single-member LLC has one owner (member), and a multi-member LLC has two or more members.
Is a single-member LLC a sole proprietorship?
A single-member LLC is not a sole proprietorship. It is an entity shielded from personal liability, while a sole proprietorship is not.
The IRS does regard a single-member LLC as a disregarded entity, which means there is no separation between the owner and the business, which means it is, by default, taxed the same as a sole proprietorship.
However, you have the option to be taxed as a C corporation or S corporation.
How does a single-member LLC pay taxes?
A single-member LLC pays taxes the same as a sole proprietorship. The IRS treats the limited liability company as disregarded, meaning there is no separation between the owner and the business.
It is treated the same as a sole proprietorship regarding tax. As a single member of your LLC, you must report all profits and losses of the LLC with your 1040 tax return.
What if my LLC does not have an operating agreement?
If your LLC does not have an operating agreement, it is subject to the state’s default laws that the LLC was formed. In most states, you are not required to have an LLC operating agreement; the LLC can still exist and protect you from individual liability.
However, having an LLC operating agreement means you can prove your LLC is an LLC, and your state will not be subject to a state’s de facto LLC laws.