1. Single-Member LLCs

Single-Member LLCs

Author: Real Estate Holding Company

Published Jul 19th, 2023Updated Feb 14th, 2024
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What is a SMLLC?

The owners of a Limited Liability Company are called members, and so a single member LLC is a limited liability company with one owner. States tend to disregard single owner entities as being mere "alter egos" of the owner. They maintain there is no legal distinction between the owner and the company. The owner is therefore personally liable for business debts. This is as unappealing as it sounds, and for many negates the benefit of forming an LLC in the first place.

Why Wyoming?

Wyoming is the only state with laws specifically written for Single Member LLCs. There is no need to for a 5% "partner" to enjoy the same benefits as everyone else. They receive the protections as Multi Member LLCs, including charging order protection from personal creditors.

This helps not only solo owners, but also those employing a holding company setup. Every subsidiary is a single member LLC with the holding company as the member.

How are they taxed?

By default, the IRS treats a single member llc as a disregard entity. You may however elect for partnership, s-corp or c-corp taxation. Simply complete form 8832 and fax or mail it in to the IRS.

Do I still need an operating agreement?

Wyoming doesn’t require it, but you still should have one. The reason being the transfer on death provision. In the event of your death, your company will transition seamlessly to the named beneficiaries. This prevents probate which often kills companies. During probate, the rightful heirs may be blocked from accessing the company bank account and signing on its behalf. Given probate lasts an average of over half a year, it's not hard to see how this kills most companies. Learn more about operating agreements here.

Should I form a Close LLC?

The Close designation was partly designed for companies with one owner. The reduced corporate formalities save time and provide better protection. Who wants to hold annual meetings and take votes when you're the only owner? Plus, creditors can't argue you didn't obey formalities when none are required. Learn more about close companies here.

How do other states differ?

Other states will argue the company was actually an “alter ego”. That is, individuals merely use companies as an extension of their activities. The company’s activities are not considered separate from the individuals. Thus, an owner and his or her company are inseparable – and accordingly so are their liabilities.

We disagree with this viewpoint as it discourages individuals from pursuing their dreams. It also stifles corporate innovation. Just because you do not want, or cannot find, a partner does not mean you should not be afforded the same protection from liabilities as owners of multi member companies. Luckily, Wyoming agrees.

Last Thoughts

You must be careful to respect the llc as a separate entity. A serious mistake is failing to keep you and your company’s finances separate. Do not co-mingle funds as it can have serious repercussions.

Treating the company as a piggy bank causes headaches for taxes and asset protection. If you fail to treat the company as a separate entity, then a judge may choose to too. You acted as though it didn’t exist, why should they?

Don’t give your creditors and the courts the chance to argue the LLC should be ignored. This is called piercing the corporate veil and generally is only possible when fraud can be proven. The LLC’s liabilities will become your own.

How do you avoid this? Income and expenses should go through the LLC’s accounts. If the LLC is short of cash, then the owner should put money into the LLC’s account. Then the LLC pays its debts from its account. Do not bypass this step and do not fail to document whether the money was a loan or contribution.

Payments to members should go via the member’s account. That is, deposit a company check in your personal account AND THEN make personal payments and purchases. Payments should be recorded as salary, return of capital, profit distribution or a loan repayment. Learn more about getting the most out of your LLC here.

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