Published in the BizWest Thought Leaders Column in April 2022
Limited liability companies (“LLC’”) are increasingly popular entities under which to operate small businesses and own real estate for rental or development. There is good reason for this as an LLC provides for greater flexibility in business management and distributions but the same limited liability for its owners as is the case with corporations. While many LLCs have several members, often there is only one member of the LLC (a “single member LLC” or “SMLLC”). Many are familiar with the idea of corporations being governed by its Bylaws and LLC’s being governed by an “Operating Agreement” – but feel that SMLLC’s don’t need this formality as there is just one member who typically controls everything. Instructions for company purpose or management processes or rules around ownership transfers (the typical focus of operating agreements) seem unnecessary as a result. However, even with this practical simplicity, there are still good reasons for even a SMLLC to have an operating agreement that covers certain circumstances or issues.
The first issue is management. Although it may seem obvious that the member will be the manager of the LLC – establishing a separate role for a “manager” other than the member is a good idea for several reasons. The business may grow to the point where the member would like to hire or retain a manager separate from themselves to run the day-to-day operations of the company. This is only possible, or made simpler, if there is an operating agreement specifically allows for this and the owner specifically elects this kind of management with the Secretary of State when registering the company. Along these same lines, describing a succession of management in the operating agreement provides a map for a continuation of management authority and dealing with banks and vendors if something happens to the single member which keeps them from managing the company.
In addition, the death of a single member of an LLC can often create confusion as to authority and hobble the ability for a successor manager or heir to continue operating the company while a probate estate is opened or other steps are taken to satisfy lenders or vendors of the proper authority to manage the company. An operating agreement can provide a beneficiary designation for membership interests allowing continuity of ownership and clear succession after the death of a single member.
Lastly, a main purpose of an LLC is to limit the liability of the business to the assets of the business and separate an owner’s personal property and activities from those of the business. An operating agreement will provide more information and policies to reinforce this distinction and support the creditor protection which is often a main reason for establishing the LLC.