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Why Every Single-Member LLC Needs an Operating Agreement

On Behalf of | Feb 15, 2024 | LLC, LLC Owner, Operating Agreement

You’ve taken the smart step of forming a single-member LLC in Arizona. This business structure offers you limited liability protection, tax advantages, and flexibility. But the journey doesn’t end with filing paperwork with the Arizona Corporation Commission. To truly solidify your LLC’s legitimacy and safeguard your personal assets, you need an operating agreement. While some may think an operating agreement is unnecessary for a solo venture, this couldn’t be further from the truth. Here’s why every Arizona single-member LLC should have one:

  1. Liability Protection: One of the primary benefits of an LLC is shielding your personal assets from business debts and lawsuits. But this protection isn’t automatic. Courts may “pierce the corporate veil” if your business and personal finances are commingled. An operating agreement creates a clear separation, demonstrating your LLC operates as a distinct entity. It’s an extra piece of evidence that your business isn’t just a shell company or alter ego. This strengthens your liability shield and gives you peace of mind.


  1. Avoiding Tax Troubles: In most cases, single-member LLCs are treated as “disregarded entities” for tax purposes, meaning your business income and expenses flow directly onto your personal tax return. However, you can elect to be taxed as a corporation, offering certain tax benefits depending upon your situation. An operating agreement clearly documents your chosen tax status, preventing confusion and potential tax issues down the line. If you decide to change your tax status, we can easily help amend your operating agreement to reflect that change.


  1. Clarity and Flexibility: Imagine facing an unexpected event like illness or disability. What happens to your LLC? An operating agreement outlines a succession plan, specifying who takes over management or handles the business in your absence. Particularly, if your LLC is manager-managed, you can appoint a successor manager who can step into your place without giving them equity in your business. This prevents chaos and ensures your wishes are respected, protecting both your business and your loved ones. 


  1. Avoiding Disputes: Even single-member ventures can encounter disagreements with external parties like creditors or vendors. An operating agreement establishes clear rules for decision-making, financial management, and business conduct. This documented framework provides a reference point for resolving disputes fairly and efficiently, minimizing legal complications. Having a framework in place also gives your business additional credibility when dealing with these outside parties. It shows that you have sat down and seriously reflected on these matters before any issues arise.


  1. Future-Proofing Your Business: You may start as a single member, but who knows what the future holds? Perhaps you bring on partners or sell your LLC down the line. Having a pre-existing operating agreement simplifies these transitions, avoiding potential conflicts and ensuring everyone is on the same page. Your operating agreement can set forth exactly how this transition should take place. It demonstrates professionalism and preparedness, enhancing your business’s value. 


Concluding Thoughts

Remember, an operating agreement is not a one-size-fits-all document. If you don’t have an operating agreement in place, Arizona’s default rules will apply. This may lead to results that you otherwise would not have intended. Consider consulting with us on how we can help secure your business using an operating agreement. We can help you draft a customized agreement that addresses your specific needs and complies with Arizona law, all for one flat fee.

Investing in a well-crafted operating agreement is an essential step for any Arizona single-member LLC owner. It’s not just paperwork; it’s a powerful tool that solidifies your liability protection, clarifies your business structure, and safeguards your future. Don’t go solo without one!