Does every LLC need an operating agreement?

What is an operating agreement?

An operating agreement is the blueprint for how your business operates. It describes what happens when disputes arise between members, how membership interests can be transferred, and who runs the business. For instance, it usually talks about whether an LLC is member-managed or manager-managed. It will also talk about the membership interest, who owns them, what compensation was paid for those interests, and how those interests are given up. In some cases, it may talk about what percentage of membership interest votes allows certain measures to pass. It may also state what happens if a member goes bankrupt, gets divorced, or dies.

Why do I need one?

If the LLC has more than two members, an operating agreement talks about what happens between the members. It talks about voting percentages, how much was paid for the membership interests, and how membership interests can be transferred. I like to think of it as the operating manual for a business – without, a business can still operate but has no idea what to do during a crisis.

So does a single member LLC need one? The single member LLC doesn’t need to worry about disputes between members. The single member LLC doesn’t need to worry about how a transfer occurs because the single member has full control of transfers. However, even with this in mind, a single member LLC does need an operating agreement!

An individual starts an LLC or corporation for two reasons: 1. to gain a tax break and 2. to gain limited liability. The tax break occurs because, depending on the tax structure chosen, an individual may be able to plan better for retirement, take more business deductions, or lessen the employment tax liability. The limited liability occurs when the LLC is treated like a separate entity. However, this limited liability is not handed out easily. An LLC must earn this limited liability. This means that an LLC must be treated as a separate entity from the business owner. When an LLC has multiple owners, it may be easier to show that the entity is separate from its owners. The business owners can probably show that they established a separate banking account and that control is vested in several people (i.e. the multiple owners). However, when the person is a single member LLC, it can be difficult to show the business was really operated in as a separate entity. For instance, even though the business has a separate business account, the person that controls that business account is the sole owner. Due to the nature of a single member LLC, it will be difficult to show that control is vested in multiple people.

This is why it is important to have all the paperwork in order to show that the individual operated the LLC as a separate entity. For an LLC, an operating agreement is the first of many documents that will show the entity truly is separate. The operating agreement, in addition to the correct state, federal, and additional documents that are kept by the business owner are the building blocks for showing the entity is truly separate. By showing that the building blocks are followed, along with the other things that need to be done to show that in practice it is separate, individuals who own LLCs can help ensure that the LLC keeps its limited liability.

To find out if you have everything in order to show your LLC is a separate entity for limited liability purposes, call Elizabeth Lewis at 720-258-6647 or email her at elizabeth.lewis@eclewis.com today.

About Elizabeth Lewis
Elizabeth Lewis is a small business attorney, mother of two, and owner of the Law Office of E.C. Lewis, PC. She works with small businesses from start up to dissolution and everything in between. In addition to running her law firm, she teaches small business owners throughout the state at various business groups, is part of the Colorado Bar Association's Business Law Section, and several chambers. Legal Background Following the advice that she has given hundreds, Denver Business Attorney Elizabeth Lewis became a small business owner in January of 2010. She opened the doors to her own law firm, the Law Office of E.C. Lewis, P.C. which specializes in business, intellectual property, technology, and online law. Prior to starting her own business law firm, she worked for the Law Firm of David A. Sprecace, P.C., where she developed the firm’s business and technology law practice. She also has extensive experience in these fields from working under the lead attorney at the CU Technology Transfer Office where she wrote licensing, non-compete, employment, and business contracts. IT Background Prior to attending CU Law School, Elizabeth worked at Experian, one of the largest credit bureaus in the country providing IT support as part of the email-marketing department. She holds a Masters of Science in Computer Information Technology, gained while working in system administration prior to law school. She continues to be active in the IT community by attending conferences, classes, and events to learn about new technology before it hits the internet. Education Elizabeth Lewis is a native of Denver, Colorado. She has attended Holy Family High School, Metropolitan State College of Denver (Bachelor of Arts), and Regis University (Masters of Science). She received her Juris Doctorate from the University of Colorado Law School and continues her legal education taking Continuing Legal Education classes from the Colorado Bar Association and Denver Bar Association on a regular basis. Additional Activities Elizabeth regularly participates in the Denver Bar Association and Colorado Bar Association. She recently was named the head of the e-Commerce Section of the Business Law Section, Colorado Bar Association. Elizabeth is active in her community and hold memberships with the Fax Partnership, South Metro Chamber of Commerce, Glendale Chamber of Commerce, Colorado Bar Association, and Denver Bar Association. She teaches regularly at locations throughout the Front Range. In her free time, she loves spending time with her family which includes her husband, two sons, and dog and enjoying all that her home state has to offer, including hiking, biking, enjoying over 300 days of sunshine a year, and most recently crossfit.

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