Starting your own business is exciting, whether you’re offering professional services, launching a boutique consultancy, or taking your side hustle full-time. Forming a single-member limited liability company (LLC) is a popular choice for solo entrepreneurs, thanks to its flexibility and liability protection. Too often, solo business owners overlook one critical document: the operating agreement. Even if you’re the only member of your LLC, an operating agreement is more than just paperwork; it’s an essential tool that protects your interests, clarifies your operations, and helps you avoid legal headaches down the road. Continue reading and reach out to a seasoned Rochester business lawyer from Lacy Katzen LLP to learn more.
What is an Operating Agreement and Why Does it Matter?
An operating agreement is a legal document that outlines the ownership structure and operational procedures of a LLC. For multi-member LLCs, operating agreements typically govern how decisions are made, how profits are shared, how disputes are resolved, and other ownership governance matters. For solo owners, the agreement also serves a vital purpose.
In New York, an operating agreement is not optional. It’s required by law. Section 417 of the New York Limited Liability Company Law mandates that every LLC adopt a written operating agreement within 90 days of formation. While the state won’t ask you to file it with any agency, failure to have one could expose your business or you to unnecessary risk.
If you don’t put your rules in writing, then the state’s default rules kick in. These rules might not reflect how you want to run your company. An operating agreement gives you control, legally formalizes your intentions, and shows the courts that you are running your LLC like a real business, not as an extension of your personal finances.
How Does an Operating Agreement Protect You?
Many solo business owners think, “I’m the only one here, why complicate things?” The truth is, a carefully drafted operating agreement does more than dictate who’s in charge. It strengthens the liability protection that LLCs are designed to provide.
If someone sues your business, courts will examine whether you’ve treated the LLC as a separate legal entity. If you’ve mixed personal and business finances or failed to document basic company procedures, a judge could “pierce the corporate veil,” making you personally responsible for business debts or liabilities.
An operating agreement is evidence that your LLC operates in conformity with the law. It outlines how and when business decisions are made, what happens if you’re incapacitated, and what steps would be taken to dissolve the business. This formality can be critical, especially if you’re applying for a loan, seeking investment, or planning to expand your operations in the future.
What Should Be Included in a Solo LLC Operating Agreement?
At a minimum, your operating agreement should include your LLC’s name and purpose, the name of the sole member, the rules for decision-making, how profits will be handled, and what happens if you choose to close the business. It may also cover tax treatment, bank account procedures, and policies for admitting future members, even if you never plan to do so.
Many business owners choose to work with an attorney to draft or review their agreement. This ensures the document is customized, compliant, and comprehensive–something generic templates often fail to deliver.
If you have additional questions or would like assistance drafting such an agreement, please reach out to Lacy Katzen LLP today.
