Single-Member LLC Operating Agreement Template
We are not lawyers! And we don't offer legal advice. If you need a template for an LLC operating agreement, there are several options on line.
If you want to know why you should or should not create an LLC, and what to do after, read on!
Table of Contents
What is a Single-Member LLC?
Single Member LLC vs Sole Proprietorship
Does a single-member LLC need an operating agreement?
How does a single-member LLC pay taxes?
Can a single-member LLC be an S-Corporation (S-Corp)?
Formation Of LLC
Obtaining an EIN (Employer Identification Number)
Other State Registrations
Tax Considerations
What is a Single-Member LLC?
LLC, or Limited Liability Company, are entities formed under state law. Similar to other legal entities such as Corporations or Partnerships, they are designed to separate your business liability from your personal assets.
If you operate without a separate business entity, then any liability of the business, including lawsuits, can go back against your personal assets. No one wants that.
A Single-Member LLC is an LLC with one owner. An LLC with more than one owner are called multi-member LLC. LLC's are often preferred by businesses because the maintenance is generally lower than Corporations, and many states give preference to them with additional legal protection over Corporations.
Single Member LLC vs Sole Proprietorship
If you have no legal entity for your business you are a sole proprietor. If you form an LLC and you are the only owner, then you are single member LLC. Here are some differences:
LLC
You have a separate legal entity for your business. When you sell something, deliver a service, or enter a contract, it is the LLC, not you personally doing it. That means the LLC can have separate bank accounts in the entities name. The LLC, if created and used correctly, can limit your personal liability for business activities.
Having an LLC can involve separate tax filings with the Federal and State governments. See Tax Considerations below.
Sole Proprietorship
In business, you are a sole proprietor by default. You don't have to do anything to be one. If you are a sole proprietor, any business bank account will have to be in your name personally, with your social security number. Not ideal!
You have NO legal protection for your business activities. If the business is sued, they can go after you personal assets.
Does a single member LLC need an operating agreement?
A few states require a single member LLC operating agreement, most do not. In order to take full advantage of the legal protection, however, you may want to create one. Some entities, like a bank, may require one in order to do business with them in the LLC name.
An operating agreement lays out things like capital contributions, how to handle profits and losses, and other business affairs.
Your operating agreement is an internal document that doesn't need to be filed with the state (unless required).
Please consult with a qualified attorney to discuss your state and situation.
How does a single member LLC pay taxes?
The IRS allows you to choose how you want to be taxed when you form a new legal entity. So you can be taxed as a sole proprietor (default), a corporation, an s-corporation, or a partnership. You make this election by filing form 8832. Again, consult a qualified professional before you make this decision. It is irrevocable.
Can a single-member LLC be an S-Corporation (S-Corp)?
Yes, a single-member LLC can elect to be taxed as an S-Corporation by filing form 2553 with the IRS in a timely manner. There are other eligibility limitations to become an S-Corp. (you can't be a nonresident alien), so make sure you check ALL of the requirements before filing.
Additionally, there is a deadline to make the election. You must file form 2553 by March 15th of the following year to use the S-Corporation election. So if you create an LLC in 2023, you will need to file before March 15th, 2024 in order to file as an S-Corporation for the 2023 tax year.
Formation Of LLC
Formation is easy, and you can do it yourself. Virtually all states allow you to pay a fee and file online. You will need to have a registered agent, in the state, and a mailing address. You will also have to do a name conflict check to make sure no one has already used that name.
Most of the time you will be able to obtain a copy of your Articles of Organization online when the process is complete. Do NOT lose this. You will need to prove that the LLC exists, like establishing a bank account in the LLC's name.
Once you've filed with the state, you need to consider registering the Feds.
Obtaining an EIN (Employer Identification Number)
If you are going remain a sole proprietor, you do not need to obtain an EIN, unless you are going to hire employees. If you elect to be taxed any other way, you will need to obtain an EIN from the federal government.
Fortunately, they have made this process easy online. You do this by completing from SS-4. You will be asked questions about where your LLC was formed, who you are, including your social security number. During this process, they will ask questions like how many members the LLC has. This question is designed to determine how your entity should be taxed.
The IRS will default to treating you as a sole-proprietor if you have only one member. You can alter this by filing form 8832.
Other State Registrations
Your LLC may need to register additional places with the state your file. Some additional registrations to consider:
Sales Tax
Withholding Tax (for employees)
Unemployment Tax (for employees)
Business Licenses
Tax Considerations
As discussed above, you have the option of choosing the way you want to be taxed when you initially create the LLC, as discussed above. Your options with the IRS are:
Sole Proprietor
Corporation
S-Corporation
Partnership
There are pros and cons to each option. Discuss these options, and the implications for your state with a qualified professional before making any decisions. You can also read more about your options in this blog article. You can also read this article on how to pay yourself from your LLC.
Conclusion
Forming an LLC is a big decision that has lots of implications. Make sure you understand whether it is a good decision for your company by consulting competent, qualified professionals.
