Sure, marketing materials are effective in catching the attention of your prospective clients and investors. However, what follows is a long string of “requirements” such as registrations, legal documents, and operating agreements to win the transaction. This is why having a readily available operating agreement is of utmost importance, especially when you want to reach your sales target or secure more funding. Whether you’re just starting a company on your own or trying to expand it, you’ll definitely need an operating agreement.
LLC stands for “limited liability company,” which allows its owners to be free from any obligations and debts acquired by the company. The common set-up is called ‘multi-member LLC,’ which is comprised of different members who act like a corporation and therefore fall under a specific tax classification. However, a single-member LLC functions albeit differently.
In certain situations, the sole owner of a company may opt to make his or her business fall under the single-member or sole member LLC structure. Under this type of business, the owner may avail of a tax classification similar to multi-member LLC. However, the following are some of its differences:
Both the Single-Member LLC and Sole Proprietorship are owned by a single person. However, they are different concerning the following:
A single-member LLC operating agreement defines the procedures as well as the financial structure of the business. Some owners may choose to use this type of agreement because of its benefits.
Use a single-member LLC operating agreement if:
It is critical to note, however, that starting an LLC is more expensive. This is because LLCs are registered under the state, which will require you to pay filing fees among other things. Aside from this, there are state-specific regulations that should be followed, so it is best to check the guidelines for LLCs before you file for one.
Any serious business will need an operating agreement, which discloses its management structure. By listing essential information about your business, your future investors, partners, suppliers, and clients can make informed decisions. This will lead them to trust your LLC and be confident about the potential of your engagement.
Operating your business without a single-member LLC operating agreement may cause you to lose time-sensitive bidding projects or prolong otherwise easy negotiations. Having this kind of document is crucial to your business’s growth, so it’s best to secure one early on.
Yes, forming a single-member LLC is somewhat more difficult than being a sole proprietor of a business. However, the additional steps will help you manage your company better in the long run.
Step 1 – Choosing a Name for a Company
Both the company name and your brand must be secured before anything else. When choosing a company name, list all the possible names that are both catchy and descriptive. Then, check online if those names are taken. You may do a quick search for websites, social media pages, or existing products that already have that specific trademark or brand. If everything’s clear, go ahead and reserve that name either through your state (usually good for 30 to 120 days) or via the online trademark registration system.
Step 2 – Completing the Articles of Organization
The Articles of Organization is a comprehensive form that serves as your “application”. In most states, this can be done online. Before you do so, make sure you have your company’s details on hand. These include the details from the groundwork you’ve already made (your company name, the main office, managers, and “certificate of status”).
Step 3 – Making Payment for a Filing Fee
After completing your online registration, you must pay filing fees directly to your state. This can also be done online or via a check. Depending on your state and the fees applicable to your company’s coverage and industry, you may need to pay between $50 to $800.
Step 4 – Preparing a Single-Member Operating Agreement
Once your business is registered you may now legally add more details through a Single-Member LLC Operating Agreement. This will reflect the same information in your Articles of Incorporation. However, it will also contain additional provisions in terms of operation, finances, and other internal business concerns. Make sure you notarize this agreement.
Step 5 – Getting an Employer Identification Number (EIN)
In order for you to open your LLC’s bank account and file taxes, you must secure your Employer Identification Number (EIN) through the IRS. This can be done for free via the IRS online site or by emailing them the IRS form SS-4.
Comprehensive business information: The agreement should begin with the company name, designated main office address, as well as the nature of the business itself.
Information about the Agent: Every state has a registry of LLC agents who directly coordinate with government offices regarding legalities and taxes for the company. Therefore, the agreement should also provide the name, contact details, and the office address of the registered agent.
Voting Rights and Ownership: The owner of a single-member LLC operating agreement should simply write that he or she owns the entirety of the LLC business. The owner may write “100%” on the blank describing the ownership.
Management Structure: The single-member LLC operating agreement should indicate if the company is managed by members or by managers (hierarchical). The difference between the two is the owner’s share of power. If it is member-managed, the sole “member” has 100% deciding capacity. On the other hand, if the sole member decides to appoint managers, these must be detailed in the agreement. For instance, the owner should specify each managers’ responsibility within the company.
Option to add members: As companies grow, so does their executive team. If the current sole member foresees the need to add new members into the LLC, indicate this in the agreement. Take note, however, that this will significantly alter your company’s structure and procedures.
Capital: Like any company, the capital should be indicated whether that may be liquid cash or assets. These should be separate from what you personally own. If, for example, a car is already under your name and would like to use it for business, you may need to execute a “deed of sale” to the company. After doing so, that is the only time you can declare that asset under the LLC.
Financial aspect: Describe your LLC’s capital contributions, financial projection, schedule of payments or salary, as well as how profits will be divided in the future. By adding this section in your agreement, you are showing tax agencies that your LLC’s profit is different from your personal income.
Successor: Your “Plan B” should always be ready for any problematic situations such as the sole owner’s incapacity or death. Because of the unique structure of a single-member LLC, the operating agreement should contain the “successor” to the business. Your investors will also want to know how such a transition will take place.
State: Since every state has a different set of guidelines for LLCs, it is important that your sole member operating agreement specifies its governing authority.
Signature: Lastly, sign the sole member operating agreement. It is highly recommended to have witnesses to this, since you are the only member. You may do this in the presence of your registered agent and a notary public as well.
If you need a guide for writing an operating agreement for a single-member LLC, look no further– you can use FormsPal’s free template below:
Step 1— Download the LLC operating agreement
Choose the file that is compatible with your computer:
Single Member LLC Operating Agreement Template – Adobe (.pdf)
Single Member LLC Operating Agreement Template – Microsoft Office Format (.docx)
Step 2— Write the title of the document
Once you’ve opened the file, you will need to input the complete name of your business. Then, indicate what type of LLC it is by writing “A Single Member Limited Liability Company” below the company name.
Step 3— Describe your company
Fill out the first paragraph of your LLC operating agreement by adding the following details:
Step 4— Discuss your organization
The purpose of the first article of the LLC operating agreement is to explain the origin and reason for establishing the business. The same information as step three will be required, so input the following in order:
Step 5— Define your single-member LLC’s purpose
The LLC operating agreement must state the exact purpose of its registration, whether that be to specifically provide a service or sell a necessary product. Once you finalize the purpose of your LLC business, add that to the first blank.
Following this, the operating agreement will also contain a short sentence that explains how it will be allowed to engage in any legal business-related transactions. There is usually no need to change this statement.
Step 6— Explain the LLC structure of authority
Operating agreements under a single-member LLC will usually find no difficulty in explaining who holds the power in the company. Unlike multi-member LLCs, an SMLLC gives its full authority to the sole owner. On the blank provided, write the full name of the single-member. Make sure that his or her name matches a valid identification document.
This section also explains that the LLC’s only member is personally “not liable” for any company obligations. There is no need to change this statement.
If the single member is manager-managed, the owner must also indicate their level of authority and obligations by listing their responsibilities.
Lastly, the LLC must also once again write the state that acts as the LLC’s governing body. As the owner, it is crucial for you to check legal guidelines in advance.
Step 7— Sign the single-member LLC operating agreement
A legal document is only valid once signed, so it is not surprising that the last part of the template needs to be fully acknowledged. In this next section, add the LLC name and the printed name of its one and only member. Make sure that you can provide a valid I.D. that matches your name on the operating agreement.
Finally, sign on the blank provided. Because a single-member LLC cannot be counter-signed by other ‘members’ as witnesses, you can sign the document in front of a Notary Public instead. If you have a registered agent, he or she may also serve as your witness.
When you want to win more investors or more clients, a single-member LLC operating agreement will help you look more professional. It may not be as attractive as a company brochure or an interactive presentation, but having an LLC operating agreement will raise your credibility. If you find it difficult to draft one, FormsPal’s free template is fairly easy to use.