Single Member LLCs Need LLC Operating Agreements

There are at least four good reasons for Single Member LLCs to have LLC Operating Agreements: 1) LLC Operating Agreements protect and enhance LLC asset and liability protection (asset and liability protection being the overriding reason clients want LLCs in the first place); 2) expanding the LLC Operating Agreement is the only way to expand the scope of LLCs and expanded scope means more ways the LLC can benefit a client’s business or investment; 3) LLC Operating Agreements are the only way to modify the South Carolina Statutory Default Rules which otherwise act as an operating agreement by default; and 4) single member LLC Operating Agreements are not expensive (see Fees and Costs).

First - Written LLC Operating Agreements enhance Single Member LLC asset and liability protection because they can be instrumental in fostering smart LLC operation and are themselves evidence of the separate and distinct legal existence of the LLC. If a single LLC owner/member mistakenly operates the LLC as an invisible extension of him or herself then the LLC will be vulnerable to challenge. (Remember the goal is not wining the law suit, it’s not getting in a law suit at all.)

Single LLC owner/members need to understand their Single Member LLC is a separate and distinct legal entity, separate and apart from themselves. An LLC Operating Agreement can be instrumental in this understanding as a learning tool. On another level, the physical existence of a written LLC Operating Agreement serves as tangible evidence of the separate and distinct legal existence of the LLC to third parties.

I cannot get all clients to read everything I send them but I try. I harp on the importance of reading and understanding the LLC Operating Agreement and my Attorney Letter.

Second - I feel the more areas covered by the LLC Operating Agreement, the greater the number of areas in which LLC organization can be used to further clients’ business or investment goals. It is my practice to include all the areas of coverage I am comfortable including in an LLC Operating Agreement (see the links at Single Member LLCs) and then remove, modify, or add based on responses and input from the clients.

More areas of coverage help mold the LLC to client expectations, help educate clients, and give clients more “bang for the buck”.

Third - Without a written LLC Operating Agreement, a Single Member LLC would be governed by the 63 page South Carolina LLC Act which by default acts as the operating agreement. I recommend a number of provisions in the LLC Act be modified in a Single Member LLC Operating Agreement. I comment on the LLC Act’s default provisions in most of the links to Single Member LLCs. If the LLC Act is not modified for Single Member LLCs, they cannot offer maximum LLC asset and liability protection.

Fourth - For the reasons stated above and considering my firm’s Fees and Costs, it makes no sense not to have a written LLC Operating Agreement for a Single Member LLC.

“Upon seeing an old lady for drafting her will, the attorney charged her $100. She gave him a $100 bill; not noticing that stuck to it was a second $100 bill. Immediately the ethical question arose in the attorney’s mind: ‘Do I tell my partner’”. Michael Rafferty, Skid Marks 14-15 (1988).