What is a Single-Member LLC?
A single-member LLC ("SMLLC") is a limited liability company with one member (owner). Within Florida, the SMLLC structure is extremely flexible on how the member can manage the company and how the member wants to declare the company’s profits. An SMLLC can elect to be treated as a sole proprietorship, a corporation, or a separate partnership for tax purposes. This provides a lot of flexibility to an individual choosing how they want to run their business in Florida.
An SMLLC is essentially a hybrid between a corporation (or corporation-like) structure, forming the company and electing to be treated as a sole proprietorship for tax purposes. The ease of doing so is really the only difference between a SMLLC and a multi-member limited liability company ("LLC"). A Florida LLC requires at least one member. Multi-member limited liability companies have each member detail what distribution percentages apply to them , whereas single member LLC members obtain 100% of any distributions (unless specified otherwise).
Operating agreements (discussed in detail in the next section) are strongly encouraged for any single-member LLC, although not "required" like Florida corporation bylaws and multi-member LLC operating agreements. Without an operating agreement, Florida law states that at the time of the member’s death, distribution will occur per Florida Probate Code instead of the SMLLC operating agreement terms.
Many people form a SMLLC for personal liability protection reasons. Members are generally shielded from certain types of liability by merely being a member of an SMLLC. In fact, under Florida law, members are not liable for any debts, obligations, or other liabilities of the limited liability company. However, Florida has mandated that limited liability companies buy certain types of insurance coverage, including but not limited to coverage for unlawful discriminatory practices in employment. Certain members, managers and officers are also protected under Florida’s Whistleblower’s Act.
Why is an Operating Agreement Essential?
Though the Florida Statutes do not mandate that a single-member limited liability company maintain an operating agreement, having one is essential. Operating agreements determine the rights and obligations of the company and its member. Operating agreements will also control over the statutory provisions of Chapter 605 Florida Statutes to the extent that the provisions conflict with the operating agreement.
Even LLCs having a single member should have an operating agreement. Although it may not seem necessary for a sole-member LLC, an operating agreement may be helpful in addressing issues such as a change in ownership or death of the member, transfer of the ownership interest in the company, disposition of profits from the company, and distribution of assets upon the dissolution of the LLC. Without an operating agreement, there are fewer predetermined rules and terms to guide the actions of the company and its member when important events or changes occur.
Key Elements of a Florida LLC Operating Agreement
The even better news is that there are several key components that must be present in an Operating Agreement. You don’t need to reinvent the wheel as you draft your Single-Member LLC Operating Agreement. Keep in mind that the Florida LLC Act does not require a written Operating Agreement in order to form a valid LLC. However, having one in place provides clarity and protection. While we list below some of the components you should include in your Florida single-member Operating Agreement, different provisions may be needed depending on the industry and state regulations. Here are some of the basics:
Name of the LLC – The name of your LLC must be distinguishable from any other registered LLCs or corporations in the State of Florida. For a complete list of naming restrictions, check out our article here.
Principal Office – Your office address, which may be needed for correspondence and permitted legal process.
Purpose of the LLC – This is the general purpose of the business being conducted by the LLC, such as a simple statement indicating you are formed to legally conduct whatever business you may choose.
Management Structure – Since you are the only member of your LLC, you are designated as the Manager under the Operating Agreement and may even appoint yourself as a Director if you wish. Even though the Florida LLC Act allows members to delegate management, they still remain responsible for decisions made by the LLC.
Duties and Responsibilities – Responsibilities and duties of the Manager, which will generally describe how the manager shall conduct themselves and how he/she shall carry out their responsibilities. The duties of one member LLC managers and managing members of multi-member LLCs are the same.
Indemnification – This will protect you and your elected Manager against liability and provide for the advancement and/or indemnification of expenses incurred in relation to claims brought against them.
Requirements to Form a Florida LLC
While Florida law does not require a single-member LLC to have an operating agreement, having one is a good idea. First, it’s critical to reiterate that Florida law clearly allows for single-member limited liability companies. Although the Florida Limited Liability Company Act does not expressly require a single-member LLC to have an operating agreement, it is recommended that every LLC have one. Adding an operating agreement to an LLC creates a set of "clubhouse rules" that says as long as you abide by these, you will have the benefits of how an LLC works.
Florida law simply requires an LLC to provide notice to any member or manager when there has been a membership change. For instance, if a member or manager moves or opens an LLC bank account, they must provide a change of information via an approved memorandum of change form or by formally amending the articles of organization with the Department of State’s Division of Corporations. There are no specific legal requirements regarding the content of an operating agreement for a single-member LLC. As such, there is no requirement that an operating agreement be updated if there is a change in member, manager, or an addition of an agent for service of process.
Benefits of a Written Operating Agreement
One of the most significant advantages of creating a written Florida Single-Member LLC operating agreement is to have in place an enforceable contract that will protect the single-member Her potential liability in wrongful death cases or injury or damage lawsuits. However, most people do not know they need an enforceable and valid contract that will protect them in court. Even though Florida Statutes do not require a written operating agreement by law, it is not uncommon for some operating agreements to be verbal or otherwise unwritten, which exposes the single-member LLC owner ("Sole Member") to personal exposure for the LLC’s debts and liabilities.
Another advantage of a written operating agreement is that the single-member LLC has the ability to draft specific conflict resolution provisions that designate whether mediation, arbitration, or even litigation of disputes will govern . In particular, the single-member LLC can choose the filing or venue location for a lawsuit and, in some cases, avoid litigation entirely by having disputes decided before a mediator or arbitrator.
In addition, when considering the estate planning needs of the Sole Member, an operating agreement can become a key part of a revocable living trust by naming the revocable living trust as a member of the single-member LLC. Since the single-member LLC can not own another LLC or corporation or be owned by another LLC or corporation, the trust is the only available alternative. As a result, all of the assets, equity and business activities of the single-member LLC can be valuable components of the revocable living trust plan.
Common Issues to Avoid
When you begin the process of writing a single-member LLC operating agreement in Florida, you want to be sure that you do not fall into any of the common pitfalls that many prospective LLC-owners do. The first thing you should do is avoid creating an LLC with the intent of not paying taxes on income. The Internal Revenue Service does not recommend that you form an LLC for anything other than the purpose of pursuing your own business or profession. Looking for a way to keep funds at bay is not a valid intention when making such an agreement and it could leave you with problems later on from the IRS.
Another trap that people often fall into is believing that they can use the same agreement template for a partnership as an LLC. A LLC is quite different from a partnership agreement in practice because LLCs are generally easier to reverse, and different tax rules apply to LLCs than partnerships. Without the precise language to clarify the specific intent of the LLC in question, a judge can find grounds to turn your LLC agreement into an accidental partnership.
Another common mistake is not outlining how profits will be shared when the LLC is being dissolved. Your agreement should address both the transition of ownership based on the passing of the single member, and how profits are collected to be distributed between heirs (if applicable). If a member dies, their ownership interests are divided and passed on to the other members, or legally distributed in other ways. Along with that, you may also want to outline what happens if the business fails and its assets need to be liquidated.
Amending an Operating Agreement
When the business landscape changes, whether that be through growth, diversification, or a one-off addition of a third party to the company, the single-member LLC owner in Florida may need to modify their operating agreement. Doing so is relatively simple and can be executed to fit the needs of the business.
The single-member LLC owner is the only member that must abide by the operating agreement, so they are free to alter it without express consent of a non-existent second member. The change must be compliant with the law governing the limitations previously agreed upon.
The Florida Revised Uniform Limited Liability Company Act (the "Act") specifies that:
"(1) an operating agreement may provide for any matter, not inconsistent with law or with the articles of organization, related to the conduct of the company’s business, including, but not limited to, any of the following:
(a) The rights and obligations of the company and members, managers, or officers if the company elects to have officers and the designation of any such officers.
(b) The purposes for which the company is organized and any activities permitted to be carried on by the company.
(c) Management of the company and, if management is vested in managers, the managers’ rights, duties, and powers, including restrictions on the discretion or powers of a manager and management by or through elected or appointed delegates.
(d) The conduct of the company’s business, including whether or not the company may enter into derivative transactions or borrow money, and the delegation of management functions and powers generally or on a case-by-case basis.
(e) The future determination of profits and losses and the allocation of profits and losses among members, including options for allocating income other than in proportion to members’ capital contributions or in accordance with the federal income tax treatment of the company.
(f) Distributions, including the timing, amount, and conditions under which they may be made.
(g) The rights, duties, and obligations of any member of the company or manager of the company in respect of another member, manager, officer, or the company generally, including indemnification of members and managers, advancement of funds to cover litigation expenses, and exculpation from liabilities, whether for negligence or performance or nonperformance of responsibilities.
(h) Restrictions on the transfer of any interest in the company unconnected with the dissolution of the company, including rights to receive distributions; provided, however, that the restrictions on transfer contained in an operating agreement may not affect transfers of a member’s interest to a trust created for the benefit of that member’s estate, guardian, or conservator; or restrict the right of a member’s personal representative, heir, or legatee to receive distributions pursuant to s. 605.0806(5)(e) during the pendency of legal proceedings, including any resulting appeals.
(i) Adoption, amendment, and repeal of the operating agreement.
(j) Whether or not to admit additional members or managers, and if so, the conditions and qualifications for the admission, including the right of the member granting the admission to veto the admission; rights to distributions, returns of capital contributions, subordination, or dilution; and any additional obligations of the new members.
(k) The method of valuing a member’s interest in the company in the event of any purchase of the member’s interest by the company or other members.
(l) Events upon which the company is to dissolve and the method for winding up the company’s affairs if not otherwise provided in the operating agreement.
(m) If the company will be a low-profit limited liability company as defined in s. 605.0102; and
(n) Any other matter, including the establishment or modification of any authority of an officer of the company."
The single-member LLC owner in Florida need only decide the terms of the new agreement, and the manner in which it will be done. There are three options to perform the modification:
1. By Way of a Written Amendment
The most common way is to append a written agreement to the original naming the previous jointly-created LLC agreement and otherwise strictly adhering to the elements of the Florida law that governs modification of a single-member LLC. It is highly recommended that the amended agreement be notarized. Parties that sign the updated agreement must be certain to keep a copy for their records. Further, the old agreement and the newly modified agreement must both be kept at the business office of the LLC.
2. By a New Operating Agreement
Another alternative to modifying the original operating agreement is to create an entirely new document that supersedes the original. This is often more desirable for aesthetic reasons, and a new agreement can be made to seem more professional or sophisticated than the original.
3. By a Written Resolution
Another method for effecting the modification of the Operating Agreement is by a unanimous written resolution. It is to be noted that the member named in the operating agreement derives the scope of their authority from the operating agreement. Absent a clause that supersedes their authority, the named member can only act in ways that are explicitly permitted.
Sources for Creating an Operating Agreement
For those who seek more information on how to draft a Single-Member Florida LLC Operating Agreement, you really have several options:
- You can search for a Florida Single-Member LLC Operating Agreement template on Google or one of the Internet’s many legal document aggregators. Keep in mind that you are looking for a Single-Member LLC Operating Agreement for a Florida LLC. Plenty of the "free legal form" sites have templates that were written by folks that don’t know Florida law, and may be missing crucial provisions for Florida.
- You can pay to have a Florida Single-Member LLC Operating Agreement drafted for you. A Florida business attorney can talk to you about the intricacies of an Operating Agreement and can draft one that meets your specific needs . This is especially helpful if you have specific needs but don’t have a lot of experience drafting LLC documents.
- You can search on Google and find a number of online services that offer a Florida Single-Member LLC Operating Agreement at a reasonable price. These services provide you with a much lower cost option than hiring an attorney to draft an Operating Agreement, but with the risk that you may get Florida Operating Agreement form that was written by an individual that doesn’t know Florida law. Always check the reviews, look for recent bad experiences, and try to determine if the provider regularly updates its forms to stay current with new changes in Florida law.