Why does a single-member LLC need a limited liability company agreement?

A Limited Liability Company (LLC) is a popular business entity choice for new businesses, including those businesses with just one LLC member. (Members are the individuals with an ownership interest in the LLC.) It is easy to understand why LLCs are so popular; unlike corporations, LLCs are not required to observe as many corporate formalities, such as having a board of directors or holding annual meetings.

It is not unusual for an individual business owner who is the sole member of an LLC to wonder why their LLC would need to observe any formalities, such as holding meetings and drafting meeting minutes to commemorate major decisions of the LLC or having a limited liability company agreement. A limited liability company agreement is sometimes referred to as the LLC’s operating agreement. A limited liability company agreement governs a variety of LLC-related variables including the relationship among an LLC’s members, the relationship between an LLC’s member(s) and the LLC, and the rights and duties of an LLC’s manager to the LLC. Not all LLCs have managers, and the sole member of an LLC may not be concerned about the relations among members, but a single-member LLC should be concerned about the relationship between their individual interests and those of the LLC.

The short answer for why a single-member LLC needs an operating agreement is liability protection. Washington law, at RCW 25.15.061, provides that “[m]embers of a limited liability company are personally liable for any act, debt, obligation, or liability of the limited liability company to the extent that shareholders of a Washington business corporation would be liable in analogous circumstances.” If someone files a lawsuit against the LLC and wants the personal assets of the LLC’s member to be used to satisfy their claim, the plaintiff could argue to the court that they should be allowed to “pierce the veil”, which essentially means to disregard the LLC on the grounds that the LLC is not being treated in a truly separate and distinct manner from the LLC member’s handling of their own personal affairs. If the court agrees and finds that the LLC’s veil can be pierced, that can result in the plaintiff being able to reach both the LLC’s assets and the LLC owner’s personal assets in order to satisfy the claim.

One of the ways that a business owner with a single-member LLC can demonstrate that the business entity is separate from their personal affairs, and thus frustrate attempts to “pierce the veil”, is to have an operating agreement and show that their actions on behalf of the LLC have been consistent with the agreement’s terms. For example, it is helpful to demonstrate that the LLC’s member has observed formalities such as holding LLC member meetings and properly documenting those meetings with minutes consistent with the operating agreement’s requirements.

When an LLC is properly formed, properly maintained, and the affairs of the business are properly segregated from the owner’s personal affairs, the LLC can offer its member(s) individual protection from liability for the actions of the entity, much like a corporation. Questions about how a single-member LLC can protect its members from individual liability or concerning limited liability company agreements? We’re happy to help!