1. Sole Member LLC
2. Advantages and Disadvantages of a Single-Member LLC
3. Pass Through Taxation
4. Taxing an SMLLC
5. LLC v. Corporation
6. Married Couples

Sole Member LLC

A sole member LLC is one of the most common types of small businesses. Also known as a single-member limited liability company, or an SMLLC, is a limited liability company (LLC) that only has one owner. The term “single-member” is based on the fact that the LLC has one owner and that the owners of an LLC are termed "members."

For registration purposes, an SMLLC is registered in the state where the it does business.

Advantages and Disadvantages of a Single-Member LLC

The primary benefit in organizing as an LLC as opposed to a sole proprietorship is that an LLC provides limited liability. The single-member LLC, like any LLC, shields personal assets from the liabilities resulting from the business of the LLC. As such, members of an LLC are usually not personally liable for the LLC’s business debts.

If the LLC is sued, bankrupt, or otherwise unable to pay its debts, the members are not at risk.

Nonetheless, liability protection does not usually protect against tort lawsuits stemming from members’ actions. Consequently, if you are performing work on behalf of the business and your actions harm someone, you can still be personally liable.

As a single-member LLC, it is more likely that you would blur personal and business finances, triggering the ability for a tort plaintiff to pierce your “corporate veil.” Therefore, if you are concerned about minimizing personal liability, it is imperative that you keep the business finances and accounts separated from any personal finances.

In fact, various courts in numerous states decided that the SMLLC is not a separate entity and, as a result, cannot be utilized as a vehicle that protects LLC assets from the creditors of the member.

Note that only three states provide SMLLC identical protection as a multi-member LLC:

  • Wyoming
  • Nevada
  • Delaware

For this reason, SMLLCs in most states will not protect against personal liability when facing a lawsuit or other claim.

If you have an SMLLC and want to avoid this issue, these are your options:

  • Create a two-member LLC (or more) that has sufficient documentation – which includes an operating agreement and annual company minutes and the like - to demonstrate that the two-member LLC is a separate entity and should be treated as such.
  • Set up a holding company in one of the three states allowing an SMLLC to own your other LLCs, thereby forcing the plaintiff to fight his or her way through one of those states before getting to your SMLLC owned by is “Parent”.

Pass Through Taxation

LLCs afford its members with pass though taxation, meaning that instead of a business entity paying income tax, the profits pass through to the members, who show income on their personal tax return. As a result of the IRS not recognizing an LLC as a business entity, members pay taxes as if they were a sole proprietorship.

Taxing an SMLLC

An SMLLC does not pay business federal taxes, and in most states, does not pay state taxes either. As an LLC, the SMLLC has all advantages and disadvantages of limited liability companies.

LLC v. Corporation

The two primary activities that distinguishes an LLC owner from the owner of a corporation:

  1. The owner of an LLC does not get a salary and is not an employee; instead, the owner takes money out of the LLC for personal expenses.
  2. The LLC owner makes an investment into the business as needed through a capital contribution of his or her own funds.

Married Couples

If a married couple has a LLC, the IRS, with respect to taxes, will treat the LLC as an SMLLC. At the state level, however, the married couple’s LLC, for tax purposes, is a “multi-member LLC.” By considering a married couples’ LLC as an SMLLC, the IRS allows the couple to utilize the disregarded entity status of an SMLLC. Note that as soon as another owner joins the LLC, it loses its SMLLC status.

If you need help with creating an SMLLC or its tax implications, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb