Is a Single Member LLC Protected?
If a limited liability company (LLC) has only one member, it is known as a single-member limited liability company (SMLLC).3 min read
2. Advantages of Single-Member LLCs
3. Disadvantages of Single-Member LLCs
4. Things to Consider
5. Filing Taxes for a Single Member LLC
Is a Single Member LLC Protected?
If a limited liability company (LLC) has only one member, it is known as a single-member limited liability company (SMLLC). When deciding what type of legal entity to utilize for your company, you may want to know if a single-member LLC truly protects the owner. Fortunately, this type of business is popular because it allows a single owner of a small business to protect personal assets. This helps limit liabilities to the owner's personal finances, which is one of the primary reasons this type of legal entity is sought after by many business owners.
Previously, there were some states that would not recognize a single-owner business as an LLC. At the present time, this has changed, and all U.S. states allow for the formation of single-member LLCs.
There are advantages and disadvantages to a single-member LLC. Both should be considered before making a decision on the type of LLC to start.
Advantages of Single-Member LLCs
- There are few legal requirements
- The company's profit or loss is reported similar to a sole proprietorship
- There is no need to file separate taxes for the LLC
- The company is not required to file annual reports or annual meeting minutes
Disadvantages of Single-Member LLCs
- It is easy to fall behind on record keeping with the lax requirements
- Courts may sometimes decide that the single owner should be personally liable for business debts
- Only three states hold the same protection for single-member LLCs as they do for traditional, multi-member LLCs
- Some states deny the protection of single-member LLC owners
Things to Consider
If the single-member LLC does not properly separate the business from the owner, and maintain documentation accordingly, a court may rule that the owner and business are not truly separate. This may be proven if the business fails to adhere to the LLC operating agreement. It may also occur if the operating agreement contains too many errors. If this occurs when the company is being sued, the owner may be held liable for debts or damages.
One example is if a customer were to slip and fall on company property. If the customer decides to sue, he must sue the LLC. If the LLC has been established correctly and kept the required records, the owner would be protected from the debt if the lawsuit is won. However, if the LLC has not been kept separate from the owner, or has not maintained thorough or correct records, the owner could be found personally liable by the court.
To help mitigate some risk when starting a single-member LLC, consider starting the business in a state that is single-member LLC friendly. If you are not able to start your business in one of these states, consider creating a parent or holding LLC that would act as an owner of the single-member LLC. A single-member LLC can also be used to start building credit for the business. The same business can then be changed to an LLC later by using the same Employee Identification Number (EIN).
Filing Taxes for a Single Member LLC
Depending on how the single-member LLC is set up, it may be portrayed either as a corporation or sole proprietorship, from a tax perspective. If considered to be a sole proprietorship, the company will not be required to file a separate tax return and should instead be filed with the taxes for the owner. According to the Internal Revenue Code (IRS), a single-member LLC is treated as a disregarded entity if filed like a sole proprietorship. However, the company does not have to give up the other benefits that are associated with a corporate entity. In this situation, the IRS requires the company to file IRS Form 8832.
From a tax perspective, the company is not thought of any differently or separately than the individual owner. The profits and losses of the company should simply be reported on Schedule C of the owner's tax filings.
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