Why the Single Member LLC Needs a Written Governance Agreement

If you run your business through an LLC, but you are a single owner, you will need a company operating agreement. This is because you expose yourself to greater chance of losing your personal liability protection without one.

GREATER RISK OF PERSONAL LIABILITY FOR SINGLE MEMBER LLCS

While the law offers the same protection against personal liability to a single-member LLC as those will multiple members, the single-member limited liability company is at a greater risk of challenge. Unfortunately, many sole business owners have lost the protection because they operated their LLC entities improperly.

The LLC laws require that the LLC itself is running a business and not you personally. Because a single owner does not have to answer to anyone other than himself, there is always a risk that a person forms a legal entity but then ignores it when running a business.

Even when this does not hold true, aggressive attorneys can attempt to convince the courts that the business is being run this way. The name for this kind of claim is "piercing the corporate veil". The way to protect yourself from this is to have an appropriate operating agreement within your LLC. It important that you follow the requirements laid out in that document.

ESTABLISHING SEPARATION WITH AN OPERATING AGREEMENT

The LLC Agreement will have to hold sufficient specifications that acknowledge the LLC as an independent and separate entity that is the business's actual operator. In doing this, it is important that you have a provision requiring that the owners vote on major decisions.

As a sole member, you must follow the procedures outlined in the operating agreement and you should be sure to document particular processes that you are complying with. Proper documentation will form a structure in which the owner acts separately and distinctly from the business.

SINGLE MEMBER COMPLIANCE: EASY BUT NECESSARY

You should not worry that you will be subject to burdensome or overwhelming documentation requirements. Keeping paperwork for your single member LLC is not difficult. You can do this through a process called Written Consent.

A single owner cannot use written consent unless the LLC Operating Agreement has provision for it. Including a Written Consent provision will let you vote and act through an uncomplicated written approval form. Using this kind of form lets you easily meet your obligations to show sufficient independence and maintain the protection against personal liability.

Because a single member does not have to answer to other members, there usually are not as many governance procedures with a single member LLC. But, with less governance evidence, the risk of personal liability becomes higher.

Accordingly, every single owned business should have a proper LLC agreement and a minimum level of documentation to evidence the independence of owner and business is essential.

CLICK HERE for details on a Single Member LLC Operating Agreement Package