LLC operating agreements

Why it’s a very good idea for single-member LLCs to have one

Photo by Jodie Andruskevich

Do single-member LLCs need written operating agreements? The question may seem odd, since, by definition, single-member LLCs have only one member, who thus completely controls his or her (or its) LLC. So how could there possibly be a meaningful agreement between a single-member LLC and its member?

However, there are many tens of thousands of New Hampshire single-member LLCs whose members are individuals and hundreds or thousands of entity-owned New Hampshire single-member LLCs. Furthermore, the New Hampshire LLC act itself expressly validates the operating agreements of single-member LLCs. So the members of single-member LLCs need to address the question.

First, as to single-member LLCs owned by individuals: For three main reasons, all of these LLCs need written operating agreements:

1. From time to time after these individuals form their LLCs, they will inevitably be sick or absent or otherwise unable to manage their LLCs. In this situation, their LLC will need — indeed, may desperately need — a non-member assistant manager to deposit checks, to accept new clients or to perform other urgent LLC management tasks. But in order for banks, customers and other third parties to accept the management decisions and actions of a non-member assistant manager, his or her identity will have to be set forth in writing — and the best place to do so will be a written LLC operating agreement.

2. The biggest legal risk that individuals who own single-member LLCs must face is the risk of “veil-piercing.” Veil-piercing is a judge-made doctrine under which the courts may disregard the statutory limited liability of a single-member LLC and hold its member personally liable for claims against it if they view the LLC and its member as being, in reality, one and the same person. But if there is a written operating agreement between the member and the member’s single-member LLC, the courts are less likely to apply that doctrine.

3. Finally, a well-drafted operating agreement can be a useful means for an individual who owns a single-member LLC to understand his or her LLC, both when it is formed and when LLC questions arise after its formation.

As for entity-owned single-member LLCs: The first question in addressing the issue whether these LLCs need written operating agreements is why a business entity may even need a single-member LLC. The answer is simple: If the entity holds all of its assets in its own name and leases, lends or licenses these assets to its single-member LLC, this holding company/operating company structure will provide major protection to these assets. This is because third parties will only be able to make valid claims against the single-member LLC — which will conduct all of its owner’s operations but will own few or no assets — and not against the parent, which will own most or all of them but will not engage in operations that can trigger claims.

However, entity-owned single-member LLCs need written operating agreements at least as much as those whose members are individuals. This is because, without a written operating agreement, the courts will be even more likely to apply the veil-piercing doctrine against entity-owned single-member LLCs than against individually-owned ones.

Furthermore, the issue of what constitutes an appropriate management structure for an entity-owned single-member LLC is often far more complex than for individually-owned LLCs. But a failure to properly tailor this management structure in a written operating agreement may greatly facilitate third-party claims against the entity.

In short, although at first blush the notion that single-member LLCs need written operating agreements may seem absurd, the indisputable fact is that they do.

John Cunningham, an attorney licensed to practice law in New Hampshire and Massachusetts, can be reached at 603-856-7172, lawjmc@comcast.net or llc199A.com.

Categories: Legal

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