5 Reasons Why a Single Member LLC Needs an Operating Agreement

Aug 17, 2016

An operating agreement is the foundation of how a Limited Liability Company (LLC) will operate. Sometimes, new entrepreneurs express that there is little or no need for an operating agreement. That may stem from the technical rule that an operating agreement is not required in Texas to form an LLC. Another reason is that there is only a single member, and a governing document is not necessary to outline how business will be conducted or how decisions will be made. However, there are some important reasons why every LLC needs an operating agreement - even single member LLCs. 

1. Minority Classifications

For businesses seeking minority certification such as the Minority Business Enterprise (MBE) certification, the certification entities (especially in Texas) will most likely require review of the business’s operating agreement as part of the checklist of required documents.

The same will likely go for the Woman Business Enterprise (WBE) where the operating will also be required as part of the checklist for documents to be reviewed.

2. Potential Investors Require It

Before putting up capital, investors will likely want to review the business’s voting procedures so that it knows how decisions are made. Investors will also be interested in powers of investment members and what duties may be imposed upon them. Distribution clauses are also reviewed to understand how the investors can expect to make a return. Other clauses that should be included should discuss how a buyout would be handled, and the triggers for any membership transfers.

3. Potential Partners Require It

Potential partners will want to review an operating agreement before assuming a position because it can illustrate how the partner will be paid, how they will be involved in the decision making process, and how interest would be handled in the event of death from one of the owners. 

4. Puts the Owner in Control

The operating agreement is a contract between the members and the organization. For single members, this contract is assured to be approved and executed. Consequently, ever singly member LLC should customize an operating agreement to do exactly what the member wants it to do. Using another LLC’s operating agreement or a basic template from the Internet or local office supply store is not likely to give you all the benefits afforded to the single member to customize the agreement exactly how they want it. After all, many entrepreneurs start a business to be in control, so why would they leave the control of their operations to default state rules or some basic template?

5. Strengthen the Liability Shield

Most entrepreneurs set up a legal entity because they are told that they should shield their personal assets from the liabilities of their business. However, their are methods to defeating such a shield, otherwise known as piercing the veil. One way to strengthen the liability shield is to memorialize formalities such as annual meetings, changes in structure, major business decisions, and the rationale for making such decisions.