The Simple Step Most Single-Member LLC Owners Overlook: Operating Agreements

Many small business owners form a single-member limited liability company (LLC) because it is simple, flexible, and provides personal liability protection. However, too often, they overlook one of the most important documents for their LLC: the Operating Agreement. Even if you are the sole owner, an Operating Agreement is not just paperwork—it is a powerful legal safeguard.

Protecting the “Limited Liability” Shield

The main reason people choose an LLC is to separate their personal assets from their business assets. But courts and creditors can sometimes challenge this protection if the LLC looks too much like a personal account. Without an Operating Agreement, it is easier for someone to argue that your LLC is a “sham” or an “alter ego.”

An Operating Agreement shows that you treat your business as a legitimate, separate entity. It spells out how the company is managed, how money flows in and out, and what happens if the owner becomes incapacitated or dies. In other words, it strengthens the shield that protects your personal savings, home, and other assets from business risks.

Avoiding State Default Rules

If you do not create an Operating Agreement, your LLC will be governed by Maryland or D.C. default laws (or the laws of whatever state you formed in). Those rules may not align with your intentions. For example, they may not clearly define how profits are distributed, how decisions are made, or how your business should be transferred at death. An Operating Agreement gives you control instead of leaving your future to generic statutes.

Planning for Disability or Death

Here is where estate planning intersects with business planning. If something happens to you and you do not have an Operating Agreement, your loved ones could face delays, disputes, or even court involvement just to keep your business running. An Operating Agreement can outline who takes over management and how ownership passes, making the transition far smoother.

The Role of a Revocable Living Trust

Many business owners choose to transfer their LLC ownership interest into a Revocable Living Trust. This provides two key benefits:

1. Avoiding Probate

   Without a trust, your LLC interest may have to go through probate, which is public, time-consuming, and costly. If your LLC interest is owned by your trust, it passes directly to your chosen successor, avoiding that process.

2. Continuity of Management

   A trust names a successor trustee who can immediately step in to manage your LLC if you are incapacitated or upon your death. This prevents disruption and protects the value of your business for your heirs.

   
   

Even if your LLC is owned by your revocable trust, you still need an Operating Agreement. The trust handles ownership, while the Operating Agreement governs how the LLC itself is run. Together, they create a coordinated plan that protects both your business and your family.

Final Thoughts

For a single-member LLC owner, skipping an Operating Agreement may seem harmless. But in reality, it can expose you to unnecessary risks and undermine your estate plan. By putting an Operating Agreement in place—and coordinating it with your revocable living trust—you ensure that your business is treated as a legitimate entity, your liability shield is preserved, and your legacy is protected.

If you have a single-member LLC and need an operating agreement or a trust, call us today at 301.892.2713 or click here to schedule a complimentary Discovery Session to discuss how we can give you and your loved ones some peace of mind.

"Living with Your Bags Packed!"®

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This article is for educational purposes only and should not be considered legal advice.