All 50 states in the U.S. along with the District of Columbia allow the formation of a single-member limited liability company, or LLC. This type of business structure with a lone owner at the helm, however, may not have the same legal protections as one that has multiple members.
The LLC structure was originally conceived of as an alternative to a partnership or a corporation. In the 1970s, states began passing legislation that allowed the formation of this type of business entity, with most states requiring that they have at least two members. This is no longer the case.
An LLC offers two basic liability protections. First, members are generally not personally liable for the company's debts, which means creditors can't go after a member's personal assets to satisfy the business's debts. Second, this particular business structure prevents a member's personal creditors from going after company assets thanks to a legal mechanism called a charging order. However, both of these types of protection are less robust for a single-member LLC.
Piercing the Corporate Veil
"Piercing the corporate veil" is what happens when a court decides that a business owner who would otherwise be insulated from responsibility for business debts should in fact be liable for them. Sometimes this decision is the result of the owner's individual culpability for the debts in question, but sometimes it happens because a business owner fails to preserve adequate separation between company and personal finances. A court is more likely to disregard an LLC as a separate business entity when the company has a single member.
A charging order allows a business owner's personal creditors to use the business and its assets to satisfy the owner's personal debts. In the case of a multiple-member LLC, creditors can only reach the indebted member's share of the company profits, so the members have protection from one another's irresponsible behavior. When there are no other members to protect, however, some courts have been willing to permit the sole member's creditors to access the company and its assets. Because this area of the law is unsettled, some business-friendly states such as Delaware and Nevada have enacted new legislation clarifying that an LLC's protection against charging orders applies regardless of the number of members.
You can mitigate these potential negatives by being rigorous about keeping personal and company finances separate. For example, your company should have its own bank account that handles all business income and expenses. Having an operating agreement for your company and scrupulously following its procedures is another recommended step.
The Internal Revenue Service (IRS) treats a single-member LLC as a "disregarded entity" for tax purposes unless the company elects otherwise. The IRS acts as though the LLC doesn't exist; its profits and losses pass through to the members, who report the income on their individual income tax returns. The company itself pays no taxes on its income. Depending on its business, the company may need to pay employment or excise taxes.
An LLC can choose to be taxed as a corporation by filing an Entity Classification Election form (Form 8832) with the IRS. In this case, it pays taxes on its income, and the its single member also pays taxes on money they receive from the company. Although this double taxation can be a disadvantage, it is one way to help substantiate the fact that the LLC is a separate entity from its owner.
If you want to go into business for yourself, an LLC can be a excellent choice. An experienced attorney can help you get your company launched with minimum expense and headache.
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