Business Operating Agreement Avoids Piercing the Corporate Veil

Many small businesses, particularly a Limited Liability Company (LLC), are owned and operated by one member. This is what is known as a single-member LLC. An expertly crafted and properly implemented business Operating Agreement is an important factor in avoiding “piercing the corporate veil.”

The Operating Agreement should not only define the rights and responsibilities of the members, but it should also describe who has decision-making authority, how that authority is exercised, what the process is to resolve a dispute between the members, and how members may be admitted or removed from the company.

Contact MBM Law to answer your business Operating Agreement questions.

Does a Single Member LLC Need an Operating Agreement?

Single members of an LLC may ask themselves why they would need an Operating Agreement when they are the only person making decisions for the company. After all, there would not be any conflict with another Member and so why have written rules?

The purpose of a single-member LLC Operating Agreement is to identify the process and procedure by which the member makes decisions, it identifies precisely who the decision-maker is, and even how another member can be admitted to the company in the future. Practically speaking, many financial institutions and banks also require an Operating Agreement to open an account for the business.

If you are a single-member LLC, contact the business attorneys at MBM Law to assist with your legal needs.

Single Member Operating Agreement

If a single member of an LLC either does not have an Operating Agreement or fails to abide by it, the non-adherence can also be a factor in “piercing of the corporate veil.”

Piercing the corporate veil is a legal term used to describe the process by which a court can determine that the members of an LLC are personally liable for the debts of the company. An LLC generally shields its members from liability, meaning that recovery in a lawsuit filed by a creditor of the business will be limited to the assets that are owned by the company. However, if certain actions are taken by the company, (many of which an effective Operating Agreement will restrict), then the members can be sued personally for the debts of the company.

Whether you are a single or multiple-member business, you will have unique circumstances that require the experience of MBM attorneys. Reach out to our legal business team to discuss your needs.

How to Avoid Piercing the Corporate Veil

The theory behind piercing the corporate veil is that, if a company is run appropriately, it is being treated as an entirely separate entity from its owners. However, if the owners of the company begin to blur the line between their personal business and the company business, the corporate veil can be pierced. A well-drafted Operating Agreement is evidence of how the company is being run and will guide its members away from compromising actions.

In a multi-member LLC, having an Operating Agreement is even more crucial. With numerous members involved in the company, there is always a likelihood for disagreement. By agreeing in advance about how to handle these situations, the Operating Agreement will help guide members through these difficult periods and bring the disagreements to an appropriate conclusion.

Choose MBM Law for Important Clauses in Operating Agreement

MBM attorneys know the importance of an Operating Agreement and how to draft one specifically tailored to your business’s needs right now and how to plan for those situations which compromise future success. Foregoing an Operating Agreement is often far more expensive in the future should a problem arise.

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Call MBM any time, whether you don’t have an Operating Agreement and need one drafted, need to have an existing Operating Agreement reviewed, or even to modify an existing Operating Agreement to include a provision to address a current situation that was not contemplated under your original document.

John Prorok & Lawrence Maiello

John H. Prorok possesses an invaluable understanding of privately held business owners’ needs in business planning, corporate formation, and transactions. He frequently speaks and counsels emerging and start-up enterprises, offering insightful legal strategies toward success.

Lawrence Maiello acts as general counsel to emerging and mid-sized businesses, and offers business strategies to business owners and entrepreneurs at the Small Business Development Center at the University of Pittsburgh.