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Do I Need an LLC Sole Proprietorship Operating Agreement?

If you’re a solo business owner, you might think you don’t need an LLC sole proprietorship operating agreement. Why would you need to put an agreement with yourself in writing? After all, you will always agree with yourself, right 🤔? 

The truth is, yea, you do need an operating agreement for your sole proprietorship LLC for a variety of reasons. It’s not as simple as just creating articles of organization and calling it a day. Read on to learn more 📖 about an LLC sole proprietorship operating agreement and what it needs to include.

What’s an LLC Sole Proprietorship?

Let’s start with this basic question. A limited liability company (LLC) sole proprietorship refers to a company with a single owner. The LLC stands as a single entity and helps protect your personal assets from company debts💸. Another name for a sole proprietorship LLC is “single-member LLC.”

Just like a multi-member LLC or limited partnership, a sole proprietorship LLC benefits from LLC tax classification as a disregarded type of entity. This means that apart from an exemption from the federal tax return, you don’t need to file any returns or pass-through taxation! Plus, as the sole owner, you are also free from any personal liability.  

Do I Need an Operating Agreement for a Single-Member LLC in California? 

The short answer! Yes, yes you do. Some states do not require a comprehensive operating agreement for LLC sole proprietorship, asking only for articles of organization. However, the state of California does require an LLC sole proprietorship operating agreement. Even when the business has one owner🤵, you must have an operating agreement at the state and federal level.

Even if it wasn’t required, there’s a compelling argument to be made for including an LLC sole proprietorship operating agreement along with your articles of organization. Here’s how this crucial document can help with your business affairs. 

How an LLC Sole Proprietorship Operating Agreement Can Help You

When you’re creating your LLC, you need to set up your articles of organization, pay the filing fee, and self-employment taxes. Then you can work on your LLC sole proprietorship operating agreement. Aside from the legal implications for your business arrangement, this step is crucial because of the following reasons:

Declares the Credibility of Your Business

Having an LLC sole proprietorship agreement indicates that your business stands as an independent type of business entity and doesn’t rely on another business for survival or liability protections. Therefore, when you approach other individual partners, they can look to this document so they feel comfortable readily making capital contributions to the business 😇.

You can also open a bank account for your LLC once it’s proven a credible institution with limited liability protection. The LLC operating agreement, along with your articles of organization and other documents, can help prove this status to the bank. 

Serves as Evidence for Separation for Liability

With an LLC operating agreement in place, you have extra reinforcement your sole proprietorship stands as an independent legal entity from your other business assets 🗣. This can help declare to potential lawsuit seekers that you as a person have limited liability, thus dissuading them from challenging the personal liability protection afforded by your LLC status. 

Defines the Succession Plan for Your LLC Sole Proprietorship

With an LLC sole proprietorship operating agreement, you can state how assets should get subdivided if you decide to dissolve the LLC. An operating agreement also allows you to outline how you want your LLC managed in case you become incapacitated or die🤦. This portion of the agreement can essentially act as a living will for your business activities. 

Things to Include in Your LLC Sole Proprietorship Operating Agreement

When drafting your operating agreement template, you need to make sure it covers the purpose of your business, its finances, and the type of internal operations ⚙. Ensure that you present a complete agreement that addresses all details. This crucial document should include the following legal requirements.

Company Details for Your Sole Proprietorship

What is the name and address of your sole proprietorship LLC? These details should come first 😎. In this section, you must also state the purpose of your business through a certificate of organization. 

Management for Your LLC Sole Proprietorship Operating Agreement 

State whether your business is manager-managed or member-managed. If member-managed, you need to indicate your sole ownership. As a sole owner of the business, your percentage of ownership should be 100%. If your business is manager-managed, you need to state the number of managers you work with💪 and their ownership percentages.  

Registered Agent and Office for Your LLC

When starting your limited liability company, you need to select a registered agent. You must also list a registered office location in your internal document. Your registered agent must be available to answer legal, government, and tax notifications regarding your business transactions. This agent might simply be you, but some people choose to designate a lawyer.

LLC Sole Proprietorship Operating Agreement Ownership

In this section, you must state that you solely own the business (100%). You must also state that you have all the voting rights 🖊 for your business venture. As the sole owner, you have the responsibility to oversee:

  • The types of business entities in your LLC
  • Your general business structure
  • Statement of your business formalities
  • Default rules for interactions with business partners, including foreign corporations (if the business should expand)
  • Processes for handling finances, including initial capital contributions and business bank interaction

Process for Adding New Members to the LLC

State whether you will accept new members in the future or not. Outline the formula for recruiting new members into this type of business entity. You need to develop business structures that can accommodate other business people. With proper structure, other business people can understand your form of business organization. 

Payment Rate for Your LLC Sole Proprietorship Operating Agreement 

In this section, you indicate the compensation rate 💰 you’ll receive as the business owner. You also need to outline whether you expect a monthly salary or lump sum payments. This information is also vital for tax purposes😇. 

Apart from these six factors, you should also include the following in your LLC operating agreement:

  • Governing laws
  • Capital contributions
  • Protocol for annual meetings
  • Dissolution and succession
  • Your signature ✍

Getting Help with Your LLC Sole Proprietorship Operating Agreement Form

Are you starting an LLC company and have no idea how to navigate the documentation process? You can purchase our LLC Operating Agreement template to guide you in the process. Also, remember that creating a single-member LLC operating agreement is just one step in forming and managing your business. Once you complete this document 📋 along with your articles of organization, you might consider signing this legal document as a sole business owner before a notary public, for example.

Our legal team can help you💪 in creating an LLC sole proprietorship operating agreement and key documents for your business. We are happy to assist you and can give you step-by-step guidance for your new limited partnership or single-member LLC 🤝. Reach out to us here to get started!