Starting a business as a sole proprietor sounds so easy and quick, right? In fact, if you are planning a home-based business to boost your income, then you might be tempted to consider a sole proprietorship business without going through all the legal formalities. This is because as a solopreneur you don’t know anything about a single-member LLC operating agreement. Worry not! In this article, I am going to discuss the key points you need to know about a single-member LLC formation and operating agreement.
What You Should Know About Single Member LLC?
First, let me explain what exactly is a single-member LLC. It is a business entity that is owned by one person. Sometimes, a single-member LLC is also referred to as an individual limited liability company (ILC). This type of company is easy to set up and maintain, and it has limited liability protection.
It’s important to note that a single-member LLC will be taxed as a sole proprietorship unless you elect for your business to be taxed as an S corporation or partnership.
In addition to being classified as an unincorporated business in which its owner is the only member, there are other factors that make up this type of legal structure:
- There’s no distinction between the company and its owner.
- All profits from the business are taxed as personal income for tax purposes.
- The owner reports all income on their personal tax return and pays self-employment taxes on those earnings
A single-member LLC is a great option for sole proprietors and freelancers who want some liability protection in the event of an accident or lawsuit. If you are just starting out or need something simple with minimal costs, this might be the right legal structure for you.
Do I Need The Single-Member LLC Operating Agreement?
Yes, you need an operating agreement to set up a single-member LLC. It is the key document that defines your business structure. The operating agreement lets you separate your personal and business assets.
The single member LLC is a business entity that offers many of the same benefits as a corporation but without some of the corporate formalities and administrative requirements.
To begin with, you need to file the Articles of Organization with your state. Also, you must file an Operating Agreement with the state where your company resides. You further need to file this document with any banks or financial institutions in case you need loans for operating expenses or capital investments.
A simple operating agreement is enough to set up your single-member LLC. There are many online templates and sample documents available for different types of businesses. However, be sure that you select one from a reputable source.
What to Include in the Operating Agreement of A Single Member LLC?
The operating agreement of an SLLC should include all the provisions that pertain to its operation like voting rights, financial responsibilities, etc. You should also consider appointing a corporate agent who acts on your behalf while dealing with third parties like banks etcetera.
What Are The Essential Elements To include in Your Single-Member LLC Operating Agreement?
- The name and address of each member.
- The name and address of the registered agent for service of process, if required by state law.
- The term of the LLC (how long it will exist).
- Financial instructions, such as how profits and losses are to be shared among members, who are responsible for accounting records, etc. If there is no apparent need for financial instructions but you want to include them anyway to cover future events, then simply state that all profits will be shared equally among members. In case of business losses, they should be borne by all the concerned parties equally until there are sufficient funds remaining. You can always set up other arrangements that you feel are appropriate based on your business needs. Remember that some states have specific requirements regarding these matters. So, check with your state’s secretary of state before making any decisions on this point.
The operating agreement for LLCs should also contain a clause regarding dissolution, or what happens if the business decides to close down. In most cases, this process is relatively simple and straightforward. However, there are instances where additional steps may need to be taken. For example, if there are creditors involved then they must first release their claims against the company. Then only assets can be distributed among members.
How to Create the Operating Agreement for My Single Member LLC?
The answer to this question depends on your needs and preferences. If you want to handle the task yourself, you can use a ready template. There are many online resources that provide templates for creating your own operating agreement.
What Are The Options To Create The LLC Operating Agreement?
- Do-it-yourself (DIY) approach: You can simply start writing on your own after checking a few online resources and YouTube videos. However, it is important that you avoid the common LLC mistakes while adopting the DIY approach.
- Hire an attorney or other professional service provider: There are LLC lawyers or virtual assistants who are familiar with the process and laws governing LLCs in your state. They can tell you what important clauses to be included and/or omitted to prepare your LLC operating agreement.
- Use an LLC operating agreement template from one of the many online resources. There are template websites that also offer customization options for nominal charges.
- Take the help of trusted portals like ZenBusiness that can guide you through the entire business formation process including single-member LLC operating agreement preparation.
Apart from these, you may need the help of a few key professionals like:-
- A bookkeeper: A good bookkeeper makes sure that your books are kept up-to-date always. He also provides other valuable services like tax preparation, payroll processing, etc.
- An accountant: You need an accountant for financial reporting, tax preparation, tax planning. Also, the accountant helps in related tasks such as budget preparation and forecasting.
- A consultant – A good consultant will be able to give you advice on how to run your business more efficiently. They may also be able to help with other aspects of managing the day-to-day operations of your business. Be it taking staffing decisions, marketing strategy development and implementation, a business consultant can guide you in the right direction.
If you can’t hire so many full-time employees, you can always consider hiring virtual assistants and freelancers to help you get started.
The choice will ultimately depend on your needs and budget as well as how comfortable you feel about doing things yourself.
What If I Decide to Set Up the Single Member LLC Without An Operating Agreement?
You can establish a single-member LLC without an operating agreement. In fact, an operating agreement is not required by law. But it’s a good idea to create one because such a document can help you run your business smoothly while avoiding potential disputes. It also helps protect your business from creditors and people who may try to claim a share of the profits or assets of the company.
If you decide to set up a single-member LLC without an operating agreement, you may find yourself in a difficult situation where you are compelled to transfer ownership of the business. If this happens, there are several options available to you:
1. You can sell your company as an asset. And then you need to pay capital gains taxes on any profit you make from the sale.
2. You can sell your business by forming a new LLC. Thus you need to transfer ownership of assets and liabilities into it.
3. You can sell your business by forming a new corporation and selling shares of stock in it. However, each of these options has its own pros and cons.
A single-member LLC operating agreement is a very important document for your business. It is the first step to managing your business and protecting yourself from potential claims by debtors. An operating agreement helps avoid many of the problems that might arise while running a business. If any dispute arises with creditors or partners, you can always settle unlawful claims by producing the LLC operating agreement. In case, you are unable to have this document then you should at least consult with an attorney before setting up any kind of business venture!