Single member limited liability companies are LLCs owned by one person. The IRS actually disregards them, as the taxes reported will be filed using a schedule C and attached to an individual’s 1040. Organizing an LLC originally required two or more members so any individual who wanted to be the sole member had no choice but to take a partner. Now that all 50 states and the District of Columbia allow the formation of SMLLCs, a lot of small businesses find that the flexibility it provides works well with their business goals.
One of the biggest advantages is that a single member limited liability company’s profits and losses falls under the sole proprietorship tax reporting structure. It also provides you with more protection than a sole proprietorship if it’s treated like a separate corporate entity. There have been some cases where courts have found SMLLCs liable for this reason.
Why It May Not Be a Good Idea
Because you are a SMLLC, you may be at greater audit risk because you are filing your taxes as just like a sole proprietor. If you are audited, that means the other levels of protection are also shaky. One of the main advantages of an LLC is to protect your personal assets from creditors. Creditors cannot seek recompense by attacking a corporate entity. However, if it becomes difficult for an accountant or an attorney to see the clear line between your personal finances and the company’s, there is a strong chance that your assets will be at risk. That primary audit is the key to this process because if it is found that the member lied or cheated on his taxes or financial documents, the court will rule against the SMLLC. The case history on this is inconsistent but the jeopardy typically starts with your money trail.
If You Must Be an SMLLC
If becoming a single-member LLC is something that you have to do, then you need to do it properly:
- File an IRS form 8832 as soon as your company is formed. It’s called an Entity Classification Election and with it you can elect to be taxed like a corporation.
- If your state says that you have to file as a “disregarded entity,” then make sure your Schedule C has your tax identification number on it.
- Keep your business income and expenses separate from your personal banking financial information. That’s how trouble starts.
- Along with separate finances, make sure your records are impeccable. That means minutes, resolutions, and other necessary documentation must be pristine.
- When signing business related paperwork, make sure you represent your LLC with something similar to “on behalf of XYZ LLC” after your name.
If you do decide to take on a partner whom you want to be classified as silent, elect to have your LLC created as manager-managed with you as the manager. That way, you limit your exposure to your silent-partner and have all the decision making power. As with any legal corporate entity, the key is in the set up. There is no reason having a SMLLC should cause you grief in the long run.