Limited Liability Companies were, originally, meant to be a replacement for the standard partnership. In 1977, the IRS ruled that it would treat the very first LLC, a Wyoming-based oil company, as a partnership for tax purposes. That meant any money earned by the company would flow through it, directly to the members of the LLC. It wasn’t until 1988, however, that the IRS chose to recognize all LLCs as partnerships, rather than corporations. LLCs are thus, at the federal level, treated as partnerships, which complicates matters for Single Member LLCs. Single Member Limited Liability Companies thus face challenges unique to its business structure – challenges that anyone considering forming a SMLLC should know about and expect.
What are the differences between a Limited Liability Company and a Single Member LLC?
The main difference is right in the name. A single member LLC only has one member, or owner. Limited Liability Companies were primarily created to protect the interests of everyone involved in running the company. The assets and debts of the company were its own, and the assets and debts of each member was their own. If one member misbehaved and owed creditors money, the creditor could not seize control of the LLC – they could only collect on the proportional share being paid to that owner. Likewise, if the company went bankrupt, the personal assets of the members were safe. Single Member LLCs, on the other hand, are not partnerships and it has been up to the state courts to decide how much protection a single-member LLC should really provide.
How do you keep the court from invalidating any liability protection?
If you run a single member LLC, you have to treat it like its own separate, legal entity and have proof that you run it as an LLC. That means having an operating agreement in place, adopting resolutions when needed, and recording minutes. This might seem silly since you are the only member, but you can’t treat an LLC like a sole-proprietorship or your liability protection could be revoked.
Does the IRS treat SMLLCs any differently?
Yes. The IRS can tax LLCs as partnerships, corporations, or disregarded entities. Single Member LLCs, on the other hand, can only be taxed as either corporations or disregarded entities. The default is disregarded entity, meaning the owner simply treats the LLC as they would a sole-proprietorship and fills out schedules C, E, and F on their 1040.
However, when it comes to employment and excise taxes, the IRS still considers single-member LLCs as a separate entity. That means it must use its name and employer identification number to report, and pay, those taxes.
Are there any states that do not recognize Single Member LLCs?
Every single state either recognizes single-member LLCs, or allows LLCs to be formed with only one member. Certain states, however, offer more protection to SMLLCs than others. Nevada and Wyoming, for example, each have laws that explicitly state that liability protection applies to all LLCs, regardless of whether they are multi or single-member entities. Colorado, on the other hand, was one of the states where a bankruptcy court invalidated liability protection – in In re: Albright, the court ruled that a single member LLC’s assets could be seized to pay for the member’s debts.
How do I form a SMLLC?
Forming a single member LLC is just like forming a standard LLC. Typically you just file your Articles of Organization with the state and pay a fee. The Articles of Organization will have you list all of the LLC’s members, so you just list yourself and leave it at that. Remember, though, that you have to run the LLC as a separate business entity – that means adopting an operating agreement and keeping recorded minutes to mark any major business decisions.
Thinking about forming a Single Member Limited Liability Company but you need some help? Just give MyCorp a call at 1-877-692-6772 or leave a comment below! We are happy to answer any questions you have!