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 personal assets.
A single-member LLC operating agreement can also be referred to as 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). As a separate entity, a single-member LLC protects its owner’s assets from the company’s debts and obligations.
A single-member LLC 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 business’s profits and losses are recorded on the owner’s personal federal tax return. The earnings are subject to self-employment taxes using Schedule C in the same manner as a sole proprietorship.
Alternatively, a single-member LLC can elect to 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 LLCs. For example, any LLC doing business or organized in California must pay $800 annually.
Single-member LLC vs sole proprietorship
A sole proprietorship and single-member LLC are both businesses owned by one person.
However, unlike a limited liability company, a sole proprietorship is not legally separated from its owner. This means that the owner is still liable for the business’s debts, losses, and legal obligations.
Do Single-Member LLCs Need an Operating Agreement?
Single-member limited liability companies registered in California, New York, Missouri, Maine, and Delaware require an LLC operating agreement. While not required in the remaining states, it’s highly advised to create an operating agreement when establishing your SMLLC.
Should you create a single-member LLC operating agreement?
If you’re forming an LLC by yourself, you may think you don’t need an operating agreement. 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 single-member LLC is a separate entity removed from your assets. This is important in the event you or your LLC is sued based on your LLC business and the lawsuit is attempting to reach your personal assets.
- Define dissolution/succession: This gives you an opportunity to outline how assets and liabilities should be distributed in the event 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 single-member 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 single-member LLC is subject to the rules governing LLCs in the state where its articles of organization are filed.
How to Write a Single-Member LLC Operating Agreement
In general, the content should describe the purpose, operations, and finances of your business. If you’re serious about growing your single-member LLC, you should create a comprehensive operating agreement that includes:
Step 1 – Company Details
The company name and address of your principal place of business as well as a description of the purpose of the business.
Step 2 – Registered agent & office
Almost every state requires an LLC to appoint a registered agent and list a registered office in the state the company is registered. The registered agent must be available to accept government, legal, and tax notifications on behalf of the business. Your operating agreement should list the registered agent’s name and contact details as well as the address of the registered office.
Step 3 – Ownership
As the sole owner, simply declare that you own 100% of the limited liability company and voting rights.
Step 4 – Management
Specify if your single-member LLC is member-managed or manager-managed. If you opt for a member-managed LLC, your operating agreement should state that you’re the sole manager. If you choose a manager-managed structure, detail how many managers you intend to appoint, as well as their responsibilities and compensation.
Step 5 – Adding new members
Include the option to add additional members to your LLC at a future date. Transitioning from a single-member LLC to a multi-member LLC will require significant alterations to your operating agreement.
Step 6 – Capital contributions
Outline capital contributions, including cash, property, and other assets you’re making 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 a separate entity 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 to do so.
Step 9 – Governing laws
Declare the state whose laws will govern this agreement and company.
Step 10 – Signature
Sign the SMLLC operating agreement as the sole member. Since you’re the only one signing the document, it’s recommended that you sign it in the presence of a notary public.
Free Single-Member LLC Operating Agreement Template (PDF)
Below is a sample of an operating agreement for a single-member LLC. Click the buttons below the document to view on a completed version of the agreement or download a blank template. Click on the single-member LLC operating template to zoom in and read specific clauses.
Single-member LLC Operating Agreement
Single-Member LLC Operating Agreement FAQs
Is an LLC required to have an operating agreement?
Whether you require an operating agreement for your LLC or not depends on the state you want to form the LLC in.
What is the difference between an LLC and a single-member LLC?
The key difference between a single-member LLC and a multi-member LLC is the number of members. A single-member LLC (SMLLC), also known as a sole member LLC, is a limited liability company (LLC) with one owner (member). While 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. A single-member LLC is 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 do have options as a single-member LLC 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 a single-member LLC as a disregarded entity, meaning there is no separation between the owner and business, so it is treated the same as a sole proprietorship when it comes to tax. As a single member of your LLC, you must report all profits and losses of the LLC with your 1040 tax return.