A single-member operating agreement is a document written for a limited liability company (LLC) with only one (1) owner. The form is to be used to help solidify the entity’s status as a separate entity from the owner’s personal assets. The owner’s role in the company as well as any officer(s), registered agent, manager(s), and any other positions should be listed either by them or another person. Once completed, the document should be held at the principal place of business and is not to be filed with any government office.
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Rhode Island
- South Carolina
- South Dakota
- West Virginia
What is a Single-Member LLC?
An LLC, also known as a Limited Liability Company, is a business entity created under state law. LLCs can be owned by a single person, multiple people, a corporation, or even other LLCs. Here, we’re discussing LLCs owned by a single person. Single-member LLCs are basically a one-owner business.
Here’s the official explanation of a single-owner LLC. According to , “An LLC is an entity created by state statute… An LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes), unless it files Form 8832 and affirmatively elects to be treated as a corporation.” In other words, a single-member LLC is a separate entity from you personally, but it is also different from a corporation. It will be reflected on your federal tax return, but you won’t be personally responsible for its debts and obligations.
There are several advantages to forming a single-member LLC if you’re starting a small business by yourself. A single-member LLC is detached from its owner in regard to tax and liability purposes. It is formally and informally recognized as a legitimate business, and it has a unique name within its state that cannot be used by any other business in the state.
How to Form a Single-Member LLC
If you’re interested in forming your own single-member LLC, you’ll need to first search (you can do it online in most cases) to find out if the business name you want is still available in your state. If so, you can proceed! If the name is already taken, you’ll have to think of a different one.
Once the name is squared away, go to your department of state (business division) to get information on the process of starting an LLC. The process varies slightly from state to state, so it’s best to get state-specific information.
Then, you will need to file Articles of Organization or a Certificate of Organization. Note that there will be filing fees involved. Once you’ve filed and paid the fees, the state will process your application and you will get your certificate of formation in the mail. Congrats—you’re the owner of a single-member LLC!
After you’ve filed your state business registration, you’ll need to open a separate LLC bank account. You cannot use your personal bank account for your LLC.
Optionally, you can get a federal tax ID number that is unique to your LLC if you don’t want to use your Social Security number for business matters. It’s free and easy to get a new tax ID number from the IRS.
Though it’s not required by the state, you will probably want to spell out how you’ll run your business by creating an LLC operating agreement. This document describes how your LLC will be run, what will happen if you sell or close your business, and more. It is unique to your company, and it works to establish ground rules for your newly-formed LLC.
Using a Single-Member LLC Operating Agreement
LLCs with more than one member are required to have an LLC operating agreement, but as stated above, single-member LLCs are not held to this standard. If you think of an operating agreement as a business agreement, it’s easy to see why it isn’t required. Since you are the only member, it isn’t strictly necessary to have a business agreement with yourself.
However, most single-owner businesses still choose to put together an operating agreement, and there are a couple of good reasons why.
First of all, the operating agreement will help separate the business operations from your own personal affairs. This is really important if there’s a liability or tax issue.
Secondly, the operating agreement will describe all the operations and procedures of your LLC. It will clarify how LLC funds are used. Both of these things need to be clearly recorded, and there’s no better place to record these procedures than in an operating agreement.
The third reason to create an operating agreement is that it clarifies who takes over the LLC if you die unexpectedly or otherwise become unable to run the business. If you don’t have an official succession plan as part of an operating agreement, it will be hard for your family to continue the business or sell it when you’re no longer able to do so.
Basically, every LLC should have an operating agreement, even if it’s a single-owner business. Get help from an attorney to draw up a tailor-made document. It will be worth it in the long run.
Sole Proprietorship Vs Single-Member LLC
Sole proprietorships and single-member LLCs are both one-owner business entities, but there are a few key differences. There are several advantages to forming an LLC over a sole proprietorship:
- With a single-member LLC, your personal affairs and the business affairs are separate. You are not personally responsible for the debts and obligations of the LLC, which helps to protect you financially if the business goes south and your LLC gets sued for not paying its bills.
- A single-member LLC is more flexible when it comes to taxation. It can be taxed like a sole proprietorship, or you can choose to have it taxed as a corporation—whichever is more advantageous.
- Single-member LLCs also have fewer record-keeping and reporting requirements.
- If you form an LLC, no other business can take or use your business.