Single Member LLCs – Need to Know Information for Owners
1. Asset Protection: A great benefit of a partnership, as members of the same LLC or just between two parties, is that having an unrelated person involved in your business offers a high degree of asset protection as to third parties. With SMLLC, this asset protection is diminished and the LLC can be “disregarded” as a separate entity unless the formation and business operation compliance is properly created and maintained, and the owner keeps the business assets separate from personal assets.
In most cases, a SMLLC acts like any other LLC to keep profits and liabilities contained in the business as a separate and distinct entity from an individual’s personal assets. For example, if a tenant slips and falls at a rental property that is owned by an LLC, the liability of any lawsuit brought by the tenant should be limited to amount of assets owned by the LLC (generally, the value of the property itself plus any reserve cash saved for the business). If the property was held by an individual, the tenant could pursue a remedy against ALL the assets owned by that individual. The same protection applies against all creditors of the LLC, as long as there is no fraud or bad acts, such as negligence, on the part of the individual owning the LLC.
2. Tax Status of a SMLLC: a SMLLC is treated as a “disregarded entity” for federal income tax purposes (unless it “checks the box” and elects to be treated as an S corporation exclusively for tax purposes), and thus its profit or loss will be reported on an individual member’s Schedule C as if it were a sole proprietorship. This can save the member time and money in connection with the preparation of income tax returns, since the separate LLC entity need not file any tax return. However, for small business owners, obtaining S Corporation tax status is usually advantageous once the income of the LLC exceeds a certain amount. If, for example, the owner of the LLC is an attorney and is generating an income greater than what he or she might expect as to be paid at a law firm, then any income in excess of a “reasonable salary” amount can be treated as a dividend. Since dividends are usually taxed at a lower rate than ordinary income, this results in favorable tax treatment for the owner/employee of the LLC.
3. Ease of Administration: Setting up an LLC is fairly easy and straight forward compared to setting up a corporate entity, as are the continuing entity compliance requirements. Business records should be organized in an easy to navigate business record keeping binder that is updated at least annually. I am happy to discuss what entity formation documents and ongoing records should be kept for your particular type of business.
4. Respect the Entity: If you commingle assets of the business with your own as the owner of the LLC, the entity will not appear to be separate from the LLC owner and the liability protection of personal assets will be lost. If there is no Operating Agreement or if records are not kept current, a plaintiff in a lawsuit against the LLC will request and may be able to “set aside” the entity as though it did not exist. This would expose the owner of the LLC and all of the owner’s assets to the full liability of the lawsuit. While minimal effort is required to keep records current, this is something that must be done with regularity and consistency.