Do I Need a Written Operating Agreement for My Maryland LLC if I’m the Only Owner?

Many Maryland entrepreneurs fall into a common trap when launching a new venture. You file your Articles of Organization with the Maryland State Department of Assessments and Taxation (SDAT), pay the filing fee, and receive your acceptance letter. You believe the legal work is done. After all, if you are the sole owner, the only member of the Limited Liability Company (LLC), who exactly are you agreeing with?

The assumption that an operating agreement is unnecessary for a single-member LLC is one of the most pervasive and dangerous misconceptions in small business law. While the state does not require you to file this document to exist, the reality of running a business in Annapolis, Baltimore, or Bethesda often demands it. Without this internal governing document, you leave your personal assets exposed and your business subject to default state rules that may not align with your intentions.

Is an Operating Agreement Required by Maryland Law for a Single-Member LLC?

Strictly speaking, Maryland law does not mandate the adoption of a written operating agreement for a Limited Liability Company to be validly formed or recognized by the state. However, operating without one means your business is governed entirely by the default provisions of the Maryland Limited Liability Company Act, which may not suit your specific operational needs or risk tolerance.

While the Maryland Limited Liability Company Act permits oral operating agreements, relying on an unwritten understanding even with yourself is legally precarious. When a dispute arises, perhaps with a creditor or a third-party vendor, the lack of a written record creates ambiguity.

If you do not draft your own rules, the State of Maryland essentially drafts them for you. The default statutes found in the Maryland Code generally provide a “one-size-fits-all” framework. For example, if you do not specify how decisions are made or how capital is contributed, the statutory defaults apply. These defaults are designed to cover a wide range of businesses, from a tech startup in Silver Spring to a real estate holding company in Ocean City, and they rarely offer the specific protection or flexibility a distinct business model requires.

Furthermore, the existence of a written agreement is the primary way you signal to the courts that your LLC is a separate legal entity. This separation is the “corporate veil” that protects your personal savings, your home, and your car from business liabilities.

The “Corporate Veil” and Asset Protection

The primary reason most business owners choose an LLC structure over a sole proprietorship is limited liability protection. You want to ensure that if your business faces a lawsuit or bankruptcy, your personal assets remain out of reach. However, this protection is not absolute. It must be maintained.

Courts in Maryland can and do “pierce the corporate veil” when they find that an LLC is merely an “alter ego” of its owner. This typically happens when a judge determines there is no real distinction between the individual and the business.

Consider a scenario where a contractor in Prince George’s County is sued for a job gone wrong. If that contractor has no operating agreement, commingles personal and business funds, and keeps poor records, a plaintiff’s attorney will argue that the LLC is a sham. A written operating agreement acts as a first line of defense. It demonstrates that you treat the business as a distinct legal creature with its own rules, banking procedures, and governance structure. It explicitly states that the member’s liability is limited to their investment in the company, reinforcing the statutory protections you sought when you filed with SDAT.

Can Banks Require an Operating Agreement Even if the State Doesn’t?

Yes, most financial institutions in Maryland, including local branches of major banks and regional credit unions, require a written operating agreement to open a business bank account. Lenders and compliance officers need formal proof of your authority to act on behalf of the company and to verify the entity’s structure before extending credit or holding funds.

When you walk into a bank in downtown Bethesda or a credit union in Towson to open your business checking account, the Articles of Organization are often insufficient. The Articles prove the business exists, but they generally do not list the members or outline who has the authority to sign checks and take out loans.

The operating agreement fills this gap. It serves several practical banking functions:

• Proof of Ownership: It identifies you as the sole member with 100% ownership interest.
• Authority to Bind: It grants you the specific power to open accounts, sign contracts, and borrow money in the company’s name.
• Succession Clarity: It creates a paper trail that banks rely on to understand who controls the funds if the primary signer is unavailable.

Without this document, you may find yourself unable to open a compliant business account. This forces many new owners to run business transactions through personal accounts, a practice that constitutes “commingling of funds” and significantly weakens your liability protection.

Planning for the Unplanned: Incapacity and Succession

One of the most critical yet overlooked functions of a single-member operating agreement is succession planning. If you are the sole owner and you pass away or become incapacitated, what happens to your business?

Under Maryland’s default rules, your LLC may be threatened with dissolution, or your interest in the company may pass into probate along with your personal assets. This can lead to a situation where your personal representative or heirs are stuck dealing with the Orphans’ Court (Maryland’s probate court) before they can access business bank accounts or pay employees.

A well-drafted operating agreement can include specific transfer-on-death provisions or appoint a successor manager. This allows the business to continue operating seamlessly during a transition. For a consulting firm in Columbia or a retail shop in Frederick, a freeze on business assets for even a few weeks during probate can be fatal to the company’s reputation and cash flow.

By designating a successor manager in your operating agreement, you ensure that someone you trust has the immediate legal authority to step in, sign checks, and keep the lights on without waiting for a court order.

Does a Single-Member LLC Operating Agreement Protect Me from the IRS?

An operating agreement helps demonstrate that your LLC is a legitimate business entity separate from yourself, which is vital during tax inquiries. While single-member LLCs are disregarded entities by default, having formal governance documents supports your case against “hobby loss” reclassifications and solidifies your standing if you elect S-Corporation tax status.

The Internal Revenue Service (IRS) and the Maryland Comptroller watch closely for businesses that consistently report losses. If an auditor determines that your activity is actually a hobby rather than a trade or business, they may disallow your deductions.

This “hobby loss” rule can result in a substantial tax bill. One of the factors the IRS examines to determine if a profit motive exists is whether the taxpayer carries on the activity in a businesslike manner. A formal, signed operating agreement is evidence of business intent. It shows that you have established a professional framework for your operations.

Additionally, if you choose to have your LLC taxed as an S-Corporation, a popular strategy for Maryland businesses seeking to reduce self-employment taxes, formal corporate-style governance becomes even more important. An operating agreement can mandate the specific accounting practices and distributions required to maintain that tax election compliant with federal regulations.

Key Components of a Maryland Single-Member Operating Agreement

Even though you are the only signer, the content of your agreement matters. Downloading a generic template from the internet often leads to documents that reference laws from other states, like Delaware or Nevada, which can create confusion in a Maryland court. A proper Maryland-specific agreement should address several key areas:

• Statement of Intent: Explicitly stating that the entity is formed under the Maryland Limited Liability Company Act.
• Capital Contributions: Documenting the initial money or assets you invested to start the business. This establishes your “basis” in the company.
• Management Structure: Clarifying that the LLC is “member-managed” (run by you) rather than “manager-managed” (run by an appointed third party).
• Distributions: defining how and when you can take profits out of the business.
• Dissolution: Outlining the specific steps for winding down the business, paying off creditors, and distributing remaining assets.

Navigating Maryland’s Specific Legal Landscape

Business owners in Maryland face a unique set of regulatory and geographic realities. The proximity to Washington, D.C., means many businesses in Montgomery and Prince George’s counties often transact across borders, making clear internal governance essential to avoid jurisdictional disputes.

Furthermore, Maryland’s personal property tax on business assets is a compliance hurdle that surprises many. Your operating agreement can assign responsibility for these filings, ensuring that your business remains in “Good Standing” with the SDAT. Failure to maintain Good Standing can lead to the forfeiture of your right to do business or use the Maryland courts a risk that a structured approach to business management helps mitigate.

Whether you are running a maritime service in Annapolis, a medical practice near Johns Hopkins in Baltimore, or a government contracting firm in Rockville, the local business ecosystem relies on clarity and formality. A handshake deal with yourself is simply not enough to navigate the complexities of modern liability and finance.

Securing Your Business Foundation

The decision to form an LLC is a decision to take your business seriously. The operating agreement is the physical manifestation of that decision. It is the rulebook that protects your personal wealth, satisfies your lenders, and ensures your business can survive the unexpected. While the state may not ask for it when you file your Articles, every other stakeholder in your business journey, from your banker to your potential future buyers, will expect to see it. It is a small investment of time and effort that yields significant peace of mind.