Why the Single Member LLC Needs a Written Governance Agreement

If you run your business through an LLC, but you are a single owner, you will need a company operating agreement. This is because you expose yourself to greater chance of losing your personal liability protection without one.

GREATER RISK OF PERSONAL LIABILITY FOR SINGLE MEMBER LLCS

While the law offers the same protection against personal liability to a single-member LLC as those will multiple members, the single-member limited liability company is at a greater risk of challenge. Unfortunately, many sole business owners have lost the protection because they operated their LLC entities improperly.

The LLC laws require that the LLC itself is running a business and not you personally. Because a single owner does not have to answer to anyone other than himself, there is always a risk that a person forms a legal entity but then ignores it when running a business.

Even if this is not true, an aggressive lawyer will try to convince a court that this is the case. This type of claim is called piercing the veil and one way to guard against this is by having a proper operating agreement for your LLC and by following the requirements in that document.

LLC AGREEMENT DOCUMENTS SEPARATION FROM THE OWNER

This LLC Agreement must contain sufficient provisions acknowledging the LLC as a separate and independent entity and the actual operator of the business. As part of this, the major must have provision is one that require that votes of owners be made for major decisions.

The procedures in the operating agreement must be followed by the single member when running the business. You should document your compliance with particular provisions regularly to protect yourself. Proper documentation will help you to show that the owner acts separately and distinctly from the business. This is important, should there be a challenge in court.

COMPLIANCE IS EASY BUT NECESSARY

Do not think that you will have to subject yourself of onerous or substantial paperwork obligations. Maintaining paperwork for a single member LLC is easy. This is done through what is called the Written Consent.

Now, before a single owner can use a written consent, the LLC Operating Agreement must allow this. Another must have provision in your Agreement is the written consent authority provision which allows the single owner to vote and act via a simple written approval document. This will allow you to very easily meet and document sufficient independence to preserve your personal liability protection.

Because a single member does not have to answer to other members, there usually are not as many governance procedures with a single member LLC. But, with less governance evidence, the risk of personal liability becomes higher.

However, the risk of personal liability is greater and so having an appropriate operating agreement and knowing what you should do each year to document and prove the separation of owner and business is essential.

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