Forming a limited liability company (often called an “LLC”) is the simplest way to get the benefits of liability protection and provide for other benefits such as flexibility of management structure and choice of tax treatment. A single-member LLC is an LLC that has only one owner. A single-member LLC is often taxed as a “disregarded entity,” because from a tax perspective, the LLC does not exist, so that the profits and losses of the LLC flow through directly to the LLC’s owner.
Because of the advantages of the single-member LLC –– that there is virtually no tax impact to forming the LLC yet the LLC still has the benefits of liability protection –– the single member LLC is often chosen for many reasons –– from small business start-ups to complex corporate restructurings to estate planning transfers.
Most business owners form single-member LLCs in order to protect themselves from the possibility that creditors could come after their non-business assets in order to satisfy a business debt. In general (with some exceptions), a properly formed and operated single-member LLC (just as a corporation or multiple-member LLC) limits potential liability to the amount that the owner has invested in the LLC. However, the owner of a company (whether a corporation or LLC) is personally liable for his or her own negligence or other torts. This means that for a consultant or other professional who does not plan on having employees, if the main purpose of forming an LLC is to avoid personal liability for torts committed in connection with the performance of the owner’s duties, the “liability shield” will be of no use.
LLCs are also often used to protect the assets that are within the LLC from other liabilities of the LLC owner. This is generally called “asset protection.” Within the legal community, there has been much discussion of whether a single-member LLC provides the same asset protection as a multiple-member LLC. The reason for this discussion centers around court cases in Florida and Colorado where it was found that single-member LLCs do not provide the same protection of the owner of the LLC from the owner’s creditors as multiple-member LLCs. Accordingly, if the purpose of forming a single-member LLC is to protect the assets within the LLC, a single-member LLC may not be the best option.
Single-member LLCs remain great tools for certain activities. However, careful planning should be taken to make sure that the single-member LLC will provide the liability protection and other benefits that the owner seeks and if not, the single-member LLC may not be the best choice.
Rachel Lilienthal Stark is an attorney in Stark & Stark’s Business Law Group, concentrating her practice on the representation of start-up and emerging companies and non-profit organizations on a variety of issues including corporate formation, financing, franchising, licensing, acquisitions, real estate and intellectual property law. Ms. Stark also represents lenders in commercial loan transactions. She can be contacted at (609) 896-9060 or firstname.lastname@example.org.