Yes, under California law, every limited liability company (“LLC”) must have an Operating Agreement, even single-member LLCs. Yes, this means that as the sole member and owner, you would have the Operating Agreement custom-crafted by your trusted and experienced San Diego corporate attorney and sign the document to govern your own behavior. The Operating Agreement is one of the “essential” business records that must be maintained by your LLC. Aside from the fact that an Operating Agreement is required, it is essential for a single-member LLC to have an Operating Agreement and to abide by the Agreement strictly. Indeed, it is often more important for a single-member LLC to have an Operating Agreement than for a multi-member LLC.
Why? When you form an LLC, or any corporate entity, under California law, the LLC becomes a separate legal entity. As such, the LLC can enter into contracts and act through its members in the manner of a person. This “separateness” is what shields the personal and family financial assets of the owners from being seized by creditors of the business if the LLC defaults on its obligations and/or debts. However, this “separateness” must be strictly maintained. If there is a breach of the “separateness” or if the owners treat the LLC as a personal “piggy bank,” then the “separateness” will be lost. This is the legal doctrine called “piercing the corporate veil” (also known as the “alter ego” doctrine). When a court is asked to pierce the corporate veil, a creditor is essentially saying that the LLC should not prevent the creditor from going after the personal assets of the owners.
If asked to pierce the corporate veil, a judge will look to many factors to decide if the LLC or corporation is truly separate from its owner/owners. Such facts include whether there is a separate bank account, whether there was commingling of personal and business money, how many owners exist, and whether corporate formalities have been maintained. Among the corporate formalities are whether the LLC has adopted and strictly followed its Operating Agreement. Single-member LLCs and sole-shareholder corporations are at significant risk for being sued on the basis of the ‘piercing the corporate veil’ theory. As such, single-member LLCs must be careful about having an Operating Agreement and following the Operating Agreement strictly. If the Operating Agreement requires an Annual Meeting of members, then it is important to have an Annual Meeting. Yes, this may sound absurd since a single-member LLC is having a “meeting” of one person, but, the formalities must be maintained to protect against veil-piercing lawsuits.
As a side note, the absurdity of having a “meeting” of one person can be avoided by having your trusted corporate attorney draft a custom Operating Agreement. The Operating Agreement can eliminate the need for annual meetings. If the Operating Agreement or Articles of Organization eliminate the requirement, then the absence of an meeting cannot by statute be used by a judge in a veil-piercing analysis.
There is another reason that a single-member LLC should have a good, well-drafted custom Operating Agreement: It allows for an easy expansion of the LLC ownership. That is, a year or two or several down the road, you may want to bring in new owners or maybe give ownership units to members of your family. The Operating Agreement will allow for that. The Operating Agreement can be your “road map” to the future growth of your business.
Contact San Diego Corporate Law
For more information, call Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard focuses his practice on business law, transactional, and corporate matters, and he proudly provides legal services to business owners in San Diego and the surrounding communities. Mr. Leonard can be reached at (858) 483-9200 or via email. Like us on Facebook.