Farmers ask us all the time: what’s the point of having an operating agreement if I’m the only member of my LLC? And it’s a great question- you don’t necessarily need to write out your process for agreeing with yourself. But operating agreements still have an important role to play in the legal resilience of your single-member LLC.
You may have created your LLC because you were interested in personal asset protection. And you probably know that in order to secure that personal asset protection, you need to follow best practices like keeping separate bank accounts for business finances and personal finances, managing personal and business accounting separately, etc. These best practices show that you and your business are, in fact, separate entities and should be treated as such.
Having an operating agreement is another one of those best practices to support your personal asset protection. If you’re facing a lawsuit, the operating agreement is one additional piece of evidence you can provide to show that you were operating your business separate from yourself. Additionally, if you don’t have an operating agreement then default state statutes might fill in the blanks for you- and those default statutes might not serve you well.
Fortunately, you can get this set up very easily! Below you will find sample content of a single-member LLC operating agreement. Below each section, you’ll find explanation and tips in the call-out boxes. Read through, make changes that feel relevant to you, print it, sign it, and file it with your important documents! Presto. You’ve leveled up in legal resilience.
[Farm Name], LLC
OPERATING AGREEMENT
These aren’t the only terms and conditions for running the LLC. In running everyday matters, owners set all sorts of rules or policies for how to conduct business or make decisions. The operating agreement is the place for baseline foundational rules: who owns the business, how much money is initially contributed to the business, etc. Day-to-day operational matters are generally not included in an operating agreement.
This Operating Agreement (the “Agreement”) of Single Owner Farm, LLC (the “Company”) is entered into as of the date on the signature page by [Farmer Name] (the “Member”) for the purpose of making the acknowledgment at the end of this Agreement.
The Member has formed the Company by filing with the [State Agency] the Company’s Articles of Organization, a copy of which is attached to this Agreement as Exhibit A and incorporated by this reference.
This section creates the official link between the state-filed articles of organization and this operating agreement. It’s not necessary, just recommended.
The Member agrees as follows:
ARTICLE 1
Business Purpose and Term of Company
Section 1.1: Purpose
The purpose of the Company shall be to operate a farm business and to do any and all things necessary, convenient, or incidental to that purpose and to conduct any other lawful business.
This section is not legally necessary. It’s an opportunity for owners to incorporate the business purpose into the legal structure of the farm. The purpose can be binding in that an action taken by a member in opposition to the business purpose could be invalid. But, the phrase “… and to conduct any other lawful business” takes any teeth out of the purpose. Many farmers like incorporating a purpose into the operating agreement because it feels good to remind owners why they farm in the first place.
Section 1.3: Additional Members
Additional Members may be added upon the consent of the Member.
Deciding to add another member is simple- you simply decide to do it. But then the work begins! The existing and new member need to work together to amend this Operating Agreement with greatly expanded detail, including setting new rules for how future members may be added, how disputes are resolved, who is responsible for what duties, and much more. This Operating Agreement sample illustrates a single member agreement only, and is not suitable after another member joins. Consult our other models for a multi-member Operating Agreement.
ARTICLE 2
Capital Contributions
Section 2.1: Initial Capital Contribution and Percentage Interest
The Member shall contribute the amounts set forth on Exhibit B, attached to this Agreement and incorporated herein, as the initial capital contribution. “Capital Contributions” as subsequently used is defined to include any subsequent Capital Contributions added to the initial capital contributions.
“Capital contributions” are the assets a member contributes to the LLC. Assets contributed can be cash, equipment, or other things of value. The section on Capital Contributions is important for several reasons. First, although an LLC provides protection for personal assets, assets contributed to the LLC are no longer personal. In effect, members are liable for the LLC’s debts to the extent that each has contributed to the LLC. That’s why it’s important to get the exact contribution in writing now and into the future. In addition, an LLC needs to be adequately capitalized to be legally legitimate. How much capital do you need? Common sense suggests that you need enough to pay bills as they come due. If you can do that with cash flow from revenue, you may not need much capital.
Of note, we need to make a distinction between a capital contribution and a loan, lease, or sale. You can loan your LLC cash or sell or lease your LLC land or equipment. None of these situations is considered a capital contribution. For example, a member could loan the LLC a total of $1,000 for the opening bank account balance. This could cover the business until cash flow is sufficient to pay the member back. Unlike a capital contribution, the member has a right to be paid back for the loan. Of course, if the business folds, the business may need to pay off other creditors first and the member could end up losing that money in the end. Also, a member can sell or lease the LLC physical assets such as land or equipment rather than give the physical assets as a capital contribution. Loans, sales, and leases should all be separately documented. So now you must ask yourself: exactly what capitalization and contribution arrangement is best for your farm operation? It will depend on several factors: costs of starting up the farm, expected cash flow, expected expenses, expected revenue, and more. Contributions, expenses, and revenue all determine income at the end of the year, which determines the members’ tax obligations. This subject can be quite detailed. Bringing the farm business plan to an accountant is the quickest way to get answers on these questions. Also, bear in mind that farmers can make additional capital contributions, which may change the percentage interest breakdown, so the initial decision isn’t necessarily set in stone.
Each member must officially transfer whatever capital contribution they have promised. If they agree to contribute cash, they will need to deposit the cash in the LLC’s bank account. If they agree to contribute equipment, they will need to transfer the asset to the LLC’s balance sheet.
Section 2.2: Future Capital Contributions by the Member
The Member shall not be required to make any additional Capital Contributions or loans to the Company. Any future Capital Contributions by the Member shall be approved in amount and in valuation method by consent of the Member and recorded on Exhibit B.
Because a capital contribution is the member’s exposure to liability, this section specifically states that members are not required to contribute additional resources. Generally, a member wants to limit the total contributions to the LLC. As long as the LLC is profitable and can reasonably be expected to pay all of its bills, members might consider making loans to the LLC for on-going needs.
Exhibit B (included at the end of this sample) needs to be actively maintained if you add any more capital in the future. The modification of Exhibit B is an amendment to the operating agreement. So, the approval of the member and recording of the change are required. You should update Exhibit B as soon as you give the business money. However, it can also be done at tax time, when you have the whole picture at hand. Either way, it’s a good idea to have your accountant or tax attorney review any changes you make and go over any tax implications. Again, as mentioned in the footnotes above and illustrated in the example, a person can loan personal money to an LLC. However, loans do not go on Exhibit B, because it is not a capital contribution.
Section 2.3: Capital Accounts
The capital account is a line item account. It exists on a spreadsheet or in a Quickbooks file, for example. It’s not a bank account. The capital account is maintained for tax purposes. This section outlines the basic procedures, which are also outlined in federal tax law. Very detailed capital account regulations are at Treasury Regulations 1.704-1(b)(2)(ii)(b)(1), (b)(2)(iv). If you file your own taxes, you will need to know these basics. If you work with an accountant or tax preparer, they should know these procedures.
A capital account shall be maintained for the Member which shall be credited with: (1) the Member’s Capital Contributions, (2) the Member’s allocable share of profits, and (3) the amount of any debt of the Company that is assumed by the Member or that is secured by any property distributed to the Member. The capital account shall be debited with: (1) the amount of cash and the asset value of any property distributed to the Member, (2) the Member’s allocable share of losses, and (3) the amount of any debt of the Member that is assumed by the Company or secured by any property contributed by the Member to the Company.
To summarize, a member’s “stake” in the LLC is the total of what the person puts in, the member’s share of the pr
ofits, and the value of any debt the member personally takes over from the LLC. A member’s stake is reduced by any property the LLC gives to the member personally, the losses it gives the member, and any debt the LLC takes over for the member.
ARTICLE 3
Allocation of Profits and Losses; Distributions
Section 3.1: Allocation of Profits and Losses
All profits and losses of the Company shall be allocated to the Member as the sole owner of the Company Interest as detailed on Exhibit B.
Allocating profits and losses is done to calculate taxes – it doesn’t necessarily mean you hand out money. Members may not actually see any cash from the profit because the business is probably putting profit back into the business – not paying it out. That doesn’t matter to the IRS, however. This is because an LLC does not pay taxes on its profit. Instead, the individual members report the LLC’s profits and losses on their individual tax returns. The members will each pay income tax on their share of the profits whether or not they actually receive the money. If members get cash or property from the LLC, then the LLC is making a distribution. That’s addressed in the next section.
Section 3.2: Distributions
The member is not entitled to any distributions. The Member may declare distributions by consent. No distribution may be declared that would result in the Company being unable to pay its debts as they become due in the usual course of business or the fair value of the Company’s total assets to be less than the sum of its total liabilities.
A distribution is where the LLC actually gives members money or property, aside from any salary or wage members already receive for their duties (if any). Distributions are essentially shares of the total profit, above and beyond expenses (including salary), of the business. Again, this is different than allocating profits and losses for the purposes of paying taxes on that amount. This provision requires consent before profits in the company are distributed to the member. The Company might wish to always put profit back into the business rather than pay it out. An owner is free to make distributions as desired.
State LLC statutes usually prohibit distributions under certain circumstances, so this provision basically reinforces the law. For example, Members can’t give themselves the business’ assets if doing so would jeopardize its ability to pay the bills. This would subvert the liability protection offered by an LLC.
ARTICLE 4
Management of the Company
Section 4.1: General Powers
The Company shall be managed by its Member. The Member shall have the right, power, and authority to control all of the business and affairs of the Company, to transact business on behalf of the Company, to sign for the Company or on behalf of the Company, or otherwise to bind the Company with reference to actions including but not limited to the following matters:
- Dissolution or winding up of the Company
- Merger or consolidation of the Company
- Sale, transfer, contribution, exchange, mortgage, pledge, encumbrance, lease or other disposition or transfer of all or substantially all of the assets of the Company
- Declaration of any distributions by the Company
- Amendments to this Agreement
- Issuance of any interest in the Company, including admission of new Members and additional Capital Contributions from a Member, and
- Conversion of the Company to a different entity.
This provision establishes the LLC as a “Member-Managed LLC.” Basically, the day-to-day affairs are managed by the member themselves. Some LLCs choose to be managed by an appointed manager. This is called a “Manager-managed LLC.” For an example of this structure, see Farm Commons’ Full Operating Agreement for Sun Sisters Farm, LLC.
ARTICLE 5
Transfer or Assignment of Interests
Section 5.1: Transfer and Assignment
The Member may assign or transfer the Member’s interest in the Company upon consent.
Assignment is different than transfer of an interest. Assignment means that the person gets the profits/losses and distributions only but cannot vote. Transfer means that the person gets profits/losses/distributions plus voting rights. This provision allows either to occur upon the consent of the member.
ARTICLE 6
Dissolution
Section 6.1: Dissolution
The Company shall be dissolved, and shall terminate and wind up its affairs, upon the first to occur of the following:
The determination by the Member to dissolve the Company; or
The entry of a decree of judicial dissolution.
Although no single member can withdraw without consent of the other members, both can vote to dissolve the entire company.
A court can require an LLC to dissolve. This can happen if the LLC isn’t acting in accordance with the operating agreement or the Members are doing something illegal. Those are very, very unlikely to ever happen, however. Some state laws also automatically dissolve an LLC if it doesn’t file the annual paperwork required by most states. Be sure you keep up to date on your paperwork!
ARTICLE 7
Winding Up and Distribution of Assets
Section 7.1: Winding Up
If the Company is dissolved, the Member shall wind up the affairs of the Company.
This means that if an LLC is dissolved, members won’t ignore the dissolution by carrying on business as usual.
Section 7.2: Distribution of Assets
Upon the winding up of the Company, the liabilities of the Company, including all costs and expenses of the liquidation, shall be paid first. If there are insufficient assets, liabilities shall be paid according to their priority and, if of equal priority, ratably to the extent of assets available. Any remaining assets shall be distributed to the Member.
ARTICLE 8
Indemnification
Section 8.1: Indemnification
To the maximum extent permitted by applicable law, the Member shall not be liable to the Company or any other third party (i) for mistakes of judgment, (ii) for any act or omission by such Member, or (iii) for losses due to any such mistakes, action, or inaction.
This means that if the member makes an honest mistake or does something innocently dumb and causes the Company harm, the Company or can’t sue the member for it, even though the company is responsible to address the issue which may include carrying out financial or legal obligations that result from the mistake.
Except as may be restricted by applicable law, the Member shall not be liable for and the Company shall indemnify the Member against, and agrees to hold the Member harmless from, all liabilities and claims (including reasonable attorney’s fees and expenses in defending against such liabilities and claims) against the Member, or any of them, arising from the Member’s performance of duties in conformance with the terms of this Agreement.
An indemnification provision is simply a promise by another party to cover your losses if he or she does something that causes you harm or causes a third party to sue you. Indemnification provisions can vary quite a bit. Here, this indemnification provision means that if someone sues members for something they did on behalf of the LLC, the LLC has to pay to defend that lawsuit. An LLC should consider carrying insurance for this – without insurance, the business probably can’t afford to follow through on this provision. Farm liability insurance may or may not provide this coverage. A commercial policy might be necessary.
ARTICLE 9
Miscellaneous
Section 9.1: Separability of Provisions
Each provision of this Agreement shall be considered separable. If any provision of this Agreement is determined to be invalid or contrary to any existing or future law, the invalidity shall not affect of those portions of this Agreement that are valid.
Section 9.2: Governing Law and Jurisdiction
This Agreement and the rights of the Member shall be governed by the State of [State].
THE MEMBER AGREES TO THE TERMS OF THIS OPERATING AGREEMENT AS OF __[month, day]_, [year].
[Farmer Name]
Signature:
EXHIBIT A
[Your Articles of Incorporation can be included here].
EXHIBIT B
| Member | Item | Value | Percentage Interest |
|---|---|---|---|
| [Farmer Name] | Farmall Super A | $900 | 100% |
| Water wheel transplanter | $3000 | ||
| 1998 Ford F150 | $3700 | ||
| Irrigation Equipments | $2500 |
It is important to update this exhibit if the members contribute additional capital. However, the exhibit does not need to be updated as the value of the contributions change. The value of the contributions into the future is necessary for accounting and tax filings, but it’s not relevant to whether and how an LLC is created.