A limited liability company, or LLC, is a type of business structure that allows owners -- called members -- to avoid personal liability for the company's debts and obligations. Limited liability companies can also provide certain tax advantages. All 50 states and the District of Columbia allow the formation of single-member LLCs, but single-member LLCs may not have the same legal protections as multi-member LLCs.
Fit your business needs with the right LLC package
A single-member LLC is just what it sounds like -- an LLC with only one member, who is also the owner of the business. Originally, the LLC structure was conceived of as an alternative to a partnership or a corporation. When states began enacting legislation to allow the formation of LLCs, beginning in the 1970s, most state laws required LLCs to have at least two members, but this is not the case anymore.
A single-member LLC is treated by the IRS as a “disregarded entity” for federal income tax purposes. This means that any profit or loss from the business can be reported on the member's personal income tax, or 1040 and Schedule C forms. This means that the LLC is treated as a sole proprietorship for tax purposes. However, as of January 1, 2009, IRS rule changes mean that a single-member LLC needs to request an employer identification number, or EIN, from the IRS, and is responsible for paying excise taxes and for collecting, reporting and paying employment taxes.
An LLC generally shields members from being held personally liable for the company's debts. This means that the owner's personal assets and property cannot be taken away if there is a judgment against the company. When courts hold the members of an LLC personally liable for company debts, this is called “piercing the corporate veil.” Courts allow the veil to be pierced under certain conditions, such as if a member commits fraud. In a single-member LLC, these veil-piercing conditions are much easier to meet and may result in the owner being held personally liable for company debts and obligations.
Traditionally, an LLC shields the members from charging orders. A charging order is when the court allows a creditor to take control of a company and liquidate it to pay off owed debts. However, courts have begun to allow charging orders to be issued against the owners of single-member LLCs. For example, in 2010, the Florida Supreme Court allowed a creditor to gain financial control of a single-member LLC. Attorney Ken Laino writes in the "Asset Protection Law Journal" that this decision may make it more likely that courts will issue charging orders against single-member LLCs in any states that do not specifically rule this out.
References & Resources
- IRS.gov: Single Member Limited Liability Companies
- Walker Corporate Law Group: “Ask the Attorney”: Single-Member LLCs
- "Asset Protection Law Journal": Florida Supreme Court Limits Protection for Single Member LLC's
- Stoel Rives LLP/LLC Law Monitor: Piercing the Veil vs Direct Member Liability in Connecticut
- Limited Liability Company Center: What is a SIngle Member LLC?
- Jupiterimages/Comstock/Getty Images