- Matthew McCabe
Should a single-member LLC have an Operating Agreement?
An operating agreement is generally considered a contract that sets forth the general rules of the Limited Liability Company (LLC). It can be thought of like the constitution of the company.
Some states, such as New York and Missouri, the state requires an operating agreement for an LLC. In Arizona, an operating agreement is not required. However, if a company does not setup an Operating Agreement for an Arizona LLC then the company will be governed by the legislative's rules regarding LLC's. The legislative rules can be thought of as "default rules." Most of these rules fall under the recently changed Arizona Limited Liability Act, commonly referred to as the "New LLC Act". See A.R.S. § 29-3100 et. seq.
If an LLC has an operating agreement then most of the state "default rules" are overridden by the operating agreement. If you are forming an LLC by yourself, or already have, you may not think you need an operating agreement. However, there are a number of reasons why you may want to create one even as a single-member LLC:
Succession planning: within an operating agreement you can set forth in the unexpected event you die or become incapacitated who will be appointed to manage the LLC or to dissolve and distribute the assets. If you do not have an operating agreement you are subject to default rules. In the case of a individual that dies, the member is dissociated from the LLC. See A.R.S. § 29-3602(6)(c). The deceased member's legal representative may exercise rights of the transferee as provided in ARS § 29-3502(C) and the rights the deceased member had under A.R.S. § 29-3410 for the purpose of settling the estate. See A.R.S. § 29-3504. Additionally, if there is no member for one hundred and eight consecutive days then the company may be dissolved and forced to wind down. See A.R.S. § 29-3701. This can raise a number of issues in estate planning including a fight in probate by family members, it may not be what you would have intended for your business, and unnecessary cost and expense.
Prove Separation: having an operating agreement may act as evidence that single-member LLC is a separate entity that is removed from your personal assets.
May be requested: A bank may request an operating agreement to open an account or a title company may request one prior to closing on real property. Additionally, a future investor or additional member will likely want to review and evaluate the single-member operating agreement before investing or joining.
Thus, if you do not have an operating agreement in place you are electing to abide by what the Arizona legislature has decided, or court has interpreted, the way an LLC should operate. Additionally, if your operating agreement does not expressly address a certain subject, then the default rules can be determinative. So what? You may be thinking. However, do you want to have a politician determine the way your company runs? Even the U.S. Small Business Association website says, "Because the state default rules are so general, it is not advisable to rely on a governing body state to manage your agreement."
Now what? Thunderbird Law can generally prepare and draft a single-member operating agreement for your company for a reasonable flat fee. See our operating agreement services page for more information.