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Single-Member LLC Operating Agreement Template

Single-Member LLC Operating Agreement provides the sole owner of an entity a means of documenting the major details of their limited liability company. From how it’s financed, to the rules for adding a new member, the form walks the owner through a series of sections that cover the most important aspects of their organization. Once completed, the form is stored with the owner – it does not need to be filed with the state.

Definition: A business planning form that records the essential information of an entity that is owned by one (1) member.

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Contents

What is a Single-Member LLC?

single-member LLC is a type of business entity that is filed in the state in which it operates. A common alternative to running a sole-proprietorship, a single-member LLC provides several benefits to its owner, mainly that the owner is a separate entity to that of the business itself (shielding them from most liability). Come tax time, the entity is known as a “disregarded entity”. This means that the IRS “ignores” the company itself, requiring the LLC’s owner to pass the entity’s income and expenses through their own personal return, in the form of a Schedule C.

How to Start a Single-Member LLC

The process for starting a single-member LLC is very similar to that of a multi-member LLC. The process may vary from state to state, but generally takes on the following outline:

1. Determine the Entity’s Name

The first step in forming an LLC is to name it. Whether the owner is dead-set on a specific name or they’re looking to test the waters by seeing what’s available, they can utilize their state’s entity search to find names that suit their business. The name can be virtually anything, so long it fits within the confines set by the state. Such rules typically require “LLC”, “L.L.C”, “Ltd Liability Co.”, and other words and abbreviations be included at the end of the name. If the soon-to-be owner isn’t ready to file their new entity but they found the perfect name, they can reserve the name through their state (typically for a fee).

2. Select a Registered Agent

The registered agent can be a person or an entity. As long as they live in the state in which the LLC is filed, they’re available during normal business hours, and they’re at least 18 (doesn’t apply for registered agent companies) they can serve as the agent. Entities commonly opt to nominate a registered agent other than themselves as it gives them a means of choosing a person that will always be present to receive lawsuits, junk mail, and other unwanted (or highly important) documents.

3. Prepare the Articles of Organization

The Articles of Organization (goes by different names depending on the state) is what must be filed with the state in order for them to recognize that the LLC is real and valid. This can often be filed online – be prepared to pay a filing fee by credit card, check, or money order.

4. Create the LLC Operating Agreement

While rarely a state requirement, this step is one of the most important for ensuring the owner truly understands their “game plan” for their business. Some of the topics covered in the operating agreement include profits/losses, distributions, new member additions, compensation (salaries), management, and much more.

5. Apply for a Tax ID/EIN

This step is required for entities that intend to hire employees, open a business bank account, and more. Known as an “Employer Identification Number” (EIN), they are a completely unique designator given to a business. They are commonly compared to a person’s social security number (SSN). One can be obtained relatively easily on the IRS website.

Single-Member LLC vs. Sole Proprietor

While both sole proprietorships and LLCs have a single owner and are great options for those looking to open a small business, they differ in several major ways:

Taxes

In both an LLC and a sole proprietorship, taxes pass through the entity straight to the owner of the business, requiring them to show any income tax as an attachment to their personal tax return with a Schedule C tax form. However, unlike sole proprietorships, an LLC can opt for different tax treatments, allowing them to be taxed as a C or S corporation (so long they meet all requirements).

Liability

One of the most important differences between single-member LLCs and sole proprietorships is that the latter has no legal separation between the business and the person that owns it. Should the entity face a lawsuit, the owner is on the line for paying off any judgments. Because an LLC is a separate legal entity, it acts as a “shield” for the owner, protecting them from having to pay debts and lawsuits out of their own pocket. Note, however, that the protections an LLC offers only work if the owner is running their entity in full compliance with the law AND they don’t mix business and personal expenses.

Regulations / Compliance

Sole proprietorships win-out over LLCs in that there are little restrictions placed on the owner (due to them being a single entity in the eyes of the state). The owner of a single-member LLC needs to file an annual report with the state, keep all business expenses separate, as well as abide by state-specific restrictions regarding operation.