The limited liability company is the best legal entity for a small business but not too long ago, some states did not allow an LLC to be owned by just one person. This did not bode well because solo owned businesses make up a large percentage of all small businesses. State lawmakers soon realized this and so now a single member LLC is allowed in every state.

Without an entity such as an LLC, the sole proprietor business owner risks everything he owns now and in the future. This is a huge risk to take for anyone especially given the lawsuit crazed society we live in. Accordingly, the single member LLC is now the best liability protection vehicle for the sole owner. It is the cheapest and easiest way for a business owner to get legal asset protection without having to deal with a lot of complexity and costs.

But, in order for the single member LLC to be assured to provide the right asset protection, it should always be run pursuant to the terms of a single member LLC operating agreement. Why is this? It is because the liability layer of a single member LLC is subject to a higher risk of being nullified in a lawsuit.

An LLC is legally a separate person from its owner. So, it is the entity and not the solo owner who is the official provider of the business activity. Often times, a solo entrepreneur will form an LLC and then forget it exists and run the business as if it were a sole proprietorship. It is too easy to do this without other partners to answer to. Lawyers like to challenge this by arguing that a solo owner should be held personally liable because he failed to actually recognize his LLC and use it to run the business. This is contrary to the law but judges sometimes are swayed by this argument.

But, it always makes sense to anticipate this challenge and do everything you can to show the world that your business is being operated through the legal entity and not by you in your personal capacity. The most important action you can do is to adopt a set of operational and governance rules for your single member LLC. These provisions are in the single member LLC operating agreement. When you complete this formality, you are providing evidence to the outside world that your limited liability company is a separate being with its own rules and processes.

This is essential business planning. If you ever run into problems or are sued for business activity, the first thing a judge will want to see is your official LLC paperwork and when it was adopted. Without one, he will question whether you have been properly maintaining your LLC and operating your business through this legal entity. Prevent this suspicion from the beginning and ensure your personal liability protection with an official single member LLC operating agreement.