Composing an Operating Agreement for LLC

[SM150]

My question involves business law in the state of: Oklahoma
I am buying a small residential property in Oklahoma to be registered under an LLC name. This property does not generate any income. I like to know how to write a simple operating agreement and whether it has to be notarized? I am the only member of the LLC. I may add my son as a second member. Also do I have to open a bank account under LLC name?

Thanks in advance

SM150

[adjusterjack]

Same answer I gave you last April.

I'm not seeing any benefit from an LLC either. I've owned rental homes without one.

Why do you think you need one?

You didn't answer the question then. How about answering it now. Why you think you need one is important because many people have the wrong idea about what an LLC can do for them.

I'm not trying to discourage you from having one if you want one. I just want you to understand that you may face the same risks with one as without one.

[llworking]

Same answer I gave you last April.

I'm not seeing any benefit from an LLC either. I've owned rental homes without one.

Why do you think you need one?

You didn't answer the question then. How about answering it now. Why you think you need one is important because many people have the wrong idea about what an LLC can do for them.

I'm not trying to discourage you from having one if you want one. I just want you to understand that you may face the same risks with one as without one.

On top of this response, you cannot put the home in your living trust and in an LLC. Based on your posting history it seems to be important to you to have all of your assets in your living trust.

A good liability insurance policy might do you more good than an LLC.

[SM150]

Thanks for your response. The reason I want to buy the property with LLC name:
Individuals who are looking for any frivolous reason to file a law suit against another person, the first action of their attorney is searching to see if any property is listed under defendant's name before going any further. Do you think this is a good reason?

[adjusterjack]

An attorney who participates here under the name Taxing Matters has written the following about LLCs:

The LLC form of business, like the corporation, protects the owners of the business from personal liability for the debts of the business. For example, if the LLC enters into a contract with a third party and breaches it, the LLC is liable for that, but the LLC members are not unless they personally guaranteed the contract, which is something that lenders and astute business people often insist upon. The LLC member is always responsible for his own debts and wrongs, including liability for the negligent acts he performs for the business (and for which the LLC might also be liable). There is also the possibility of “piercing the corporate veil” (google it) which is an even bigger risk for single member LLCs.

The LLC form of business does not protect the LLC from being sued. What it does, when the LLC is operated properly, is prevent the owners from being liable for the LLCs debts simply because they are owners. Owners of sole proprietorship and general partnership businesses are personally liable for all debts of the business just because they own the business. Owners of LLCs, LLPs, and corporations are not liable just because they own the business.

But the LLC does not protect owners of the business from everything. For example, an owner of a LLC will be personally liable for any loans/credit of the LLC that the owner personally guarantees. Most lenders/businesses that extend credit to small business will routinely demand those personal guarantees. You are also always liable for your negligence. So if you are negligent while doing work for the LLC and someone is injured, both you and the LLC are liable for that. You protect against that possibility with a good insurance policy. Also, the law makes owners of businesses personally liable for a few specific obligations of the LLC, like certain tax obligations for example. So where does the LLC protect you? You will not be personally liable for contracts that the LLC enters into that you do not personally guarantee. You will also not be personally liable for the debt that arises from the negligence of other employees/owners of the LLC. Again, this assumes you run the LLC properly so that a creditor cannot successfully pierce the corporate veil to go after you personally.

Beyond that, an LLC is an asset that you own that, in itself, can be attached (along with anything it owns) in payment of a judgment.

As for finding the property, anybody astute enough to file a lawsuit against you will be astute enough to run your name through the state's business records, find the LLC, and check property records under the LLC name. Filing a lawsuit against the LLC works the same. Look up the LLC in the state's business records, find your name.

You're concerned with "frivolous" lawsuits. Yes, they happen, but not very often. And just because a plaintiff loses a lawsuit doesn't necessarily make it "frivolous." You would first have to seek sanctions by proving, not just saying, that the plaintiff filed the lawsuit knowing that there was no legal grounds for it. A plaintiff alleging negligence or breach of contract may be wrong and lose the case but those allegations are certainly legal grounds for a lawsuit and not frivolous.

Again, not trying to discourage you. It's cheap and easy to form an LLC in Oklahoma so it couldn't hurt to have one now that you understand it's limits.

By the way, I had three rentals for 20 years. Never had an LLC. Never got sued.

Back to your questions.

I like to know how to write a simple operating agreement and whether it has to be notarized? I am the only member of the LLC.

A single member LLC is governed by the state's LLC statute, which you should read, and probably doesn't need an operating agreement if you are satisfied to follow the statutory requirements. I imagine you can find a sample operating agreement online if you want one. It doesn't have to be notarized but couldn't hurt.

I may add my son as a second member.

At that point an operating agreement would be prudent and you should be able to find samples online.

Understand, though, that an LLC is a disregarded entity for income tax purposes and you use Schedule E (and other forms like self employment and depreciation).

An LLC with two or more members is treated as a partnership and makes the tax documentation more rigorous unless your operating agreement is written that your son does not share in any income and expenses and is, perhaps, just managerial. If you treat him as an employee, it just gets worse.

Also do I have to open a bank account under LLC name?

You don't have to, but it would be a good idea to have a separate account for the LLC as evidence that you are keeping the LLC separate from your personal activities.

[llworking]

Thanks for your response. The reason I want to buy the property with LLC name:
Individuals who are looking for any frivolous reason to file a law suit against another person, the first action of their attorney is searching to see if any property is listed under defendant's name before going any further. Do you think this is a good reason?

I personally do not agree that it is a good reason. Again, just get a good general umbrella liability policy if you are that worried about that sort of thing.

[SM150]

Thank you for the comprehensive response. By reading your post I realize that it would not be to my advantage to run as LLC.
Thanks again

SM150