Single Member LLCs - Pros and Cons

The LLC is touted as a great business entity for smallCons
businesses. This is particularly true for single memberThere is a sneaky con from a tax perspective when it
LLCs. If you are considering forming one of thesecomes to an LLC. Most of these entities are marketed
entities, it is important to realize there are pros andwith the statement that they can pay taxes like a
cons that need to be taken into account.partnership. This is true if there are two or more
What is a single member LLC? A person that has anmembers. Since we only have one member, the IRS
ownership interest in an LLC is called awill reject partnership tax return filings. Instead, the
“member” instead of a “shareholder” is asagency will require you to file as though the entity is a
the case with corporations. As a result, a singlesole proprietorship. This means you end up paying self
member LLC is a limited liability company that is ownedemployment taxes. At a rate over 15 percent, this can
by one person instead of multiple parties. This maybe a nasty surprise.
sound insignificant, but it actually is very important.The second con is found in the simplicity of running an
Let’s look at the pros and cons of this businessLLC. Since little is required, most people do almost
entity choice.nothing in regard to keeping records of actions taken
Prosby the LLC. In many cases, they don’t even have
The single member LLC is touted primarily because itan Operating Agreement, which is the bylaw of the
provides the owner with asset protection, but isLLC and dictates how the company will function. In
relatively simple to run. So, what do we mean by assetsuch situations, the plaintiff in a lawsuit against the LLC
protection? Well, the LLC is treated as a separatewill ask the judge to set aside the asset protection
“person” for legal purposes. Any debts it incursassociated with the company by claiming the company
by contract, lawsuit or whatever are its alone, not theis a sham since it has no records and no Operating
owner. As a result, the owner is “shielded” fromAgreement. In many cases, the court will agree and
the debts of the entity, which is a form of assetthe single member [that’s you] becomes personally
protection.liable for the business debts. That is a disaster.
A second positive aspect of the LLC is the ease ofA single member LLC definitely has a place in the
use. By this, I mean there are very few legalworld of business entities. If you decide to go with one,
requirements when it comes to running an LLC. Youmake absolutely sure you understand the tax
don’t have to have annual minutes. You reallyramification and have a solution for the internal
don’t have to keep any minutes at all. Thiscorporate documents you need including an Operating
obviously makes things pretty simple, but this is also aAgreement and minutes.
trap as we will see in the cons section of this article.