EVEN A SINGLE MEMBER LLC SHOULD HAVE AN OPERATING AGREEMENT
When clients ask me whether they should go ahead and get an Operating Agreement, I always say ‘yes’ even when I am forming a single-member LLC. Before you go accusing me of an upsell or add-on, I have my own reasons and I will lay them out below. If you’d like to speak with me about your business and my thoughts on what kind of Operating Agreement is right for you, send me a quick email from the Contact Us page and we can set up a time to talk.
First, let’s get a basic definition of an Operating Agreement. It is essentially, at its most basic level, a contract signed between all of the members of the LLC agreeing how the company will be run, including management structure, member authority, voting, distributions, transfer of membership interests, and dissolution.
An operating agreement is always necessary in a multi-member Texas Limited Liability Company. The probability of a dispute between several members is almost guaranteed. Even if the dispute doesn’t lead to litigation, it can unnecessarily wreck the relationship amongst the members as people take sides about an issue. An Operating Agreement provides efficiency so the members can at least point to a provision in the Operating Agreement that has already covered the dispute and which everyone signed off on (insert joke about how nobody read the Operating Agreement…).
I admit it seems a little strange to think that an individual that sets up a single-member Texas Limited Liability Company would need to add a formal document into its books and records about how to run his own company. It is very likely the individual will make all of the decisions about how to run the business and handle the finances, contracting, hiring and firing employees or independent contractors, etc. But, here are a few reasons an Operating Agreement is a must even for a Single-Member LLC. You don’t have to get fancy, even a short agreement will do the trick.
1. YOU WANT YOUR BUSINESS TO GROW
I don’t usually get too excited about a new client that has no plan to grow the business. I love a new client that is thinking BIG and chasing a dream or passion based on an idea to do things different. If you are going to start a company, I would rather assume you are going to be expanding in the short term and be ready rather than have to go back and redraft your documents to respond to growth. Perhaps you want to add a new member or investor. By having an Operating Agreement, this situation could be addressed and you’d have documentation to show the interested party and you’d know the process from discussing it with your attorney. You could also go ahead and have a discussion about how to document a transfer of a membership interest and the financial and voting rights a new member would obtain. This looks a lot more professional than telling the would-be buyer that your company books consist of the fill-in-the-blank form you filed with the Texas Secretary of State.
2. WE CAN SKIP SOME OF THE TEXAS DEFAULT RULES
Without an Operating Agreement, the various business codes and regulations provide for how your company will be run. Certain provisions can be changed from the default rules depending on your preferences and this is part of a consultation with your attorney for how to set up your individual company.
3. YOU WANT TO LIMIT LIABILITY
The name of the LLC says it all, and I assume you want to actually attempt to limit your liability related to business. One issue that comes up time and time again in the business litigation I handle throughout the Houston area is the threat by a plaintiff’s attorney to try to pierce the corporate veil of my client’s company to hold the member individually liable because the member isn’t really treating the company as a company. The gist is that you, as a single member, are disregarding the entity and doing things as if you are doing business as an individual. Perhaps you have no books and records, no operating agreement, no business account, sign checks in your name and not on behalf of the company, deposit company funds in your own account or use company funds/property for personal reasons, etc. If you want to achieve limited liability through doing business as an entity, you must document your entity and conduct business through that entity. I provide my client’s with a document telling them how to do this and how to run the company.
If you would like to discuss options for Operating Agreements in Texas for LLCs, send me an email from the Contact Us page. I draft short Operating Agreements that just cover the basics and I also handle highly technical drafting for complex companies that have individualized needs. Many attorneys use the same document for all their clients, but I have found that all companies are different and I would rather put something in place you understand and are comfortable with than something only I understand and am comfortable with. Feel free to reach out by email or give my office a call by going to my contact page.