Introduction: Your Single-Member LLC Guide

1. LLCs and Business Structure Basics

• Why an LLC?
• Protection From Personal Liability
• The “Novelty” of Single-Member LLCs
• Business Structures and Personal Liability

2. Taxation of SMLLCs

• Default Pass-Through Tax Treatment
• Electing Corporation Tax Treatment
• Electing S Corporation Tax Status
• State Income and Franchise Taxes
• Employer Taxes
• Sales and Excise Taxes
• LLCs Owned by Spouses in Community Property States

3. Forming Your SMLLC: An Overview

• Can I Form a Single-Member LLC?
• Naming Your SMLLC
• Managing Your SMLLC
• Articles of Organization
• The Operating Agreement
• Getting an Employer Identification Number
• Professional Limited Liability Companies (PLLCs)
• Additional Resources

4. Financing, Conversion, and Dissolution

• Capital Contributions and Capital Interest
• Distributions
• Converting a Preexisting Business to an SMLLC
• Dissolving and Winding Up Your SMLLC

5. Liability Concerns for SMLLCs

• Piercing the Limited Liability Company Veil
• Distinguishing Yourself From the Business
• Fraud or Injustice
• Are SMLLC Assets Protected From Personal Creditors?

6. Running Your SMLLC: Additional Tasks

• Establishing a Business Bank Account
• Filing Annual Reports
• Paying State LLC Taxes
• Business Permits and Licenses
• Fictitious or Assumed Name (DBA) Certificates
• Trademarks and Service Marks
• Liability Insurance
• Doing Business in Other States
• Employees

7. Financial Record Keeping and Written Resolutions

• Financial Record Keeping
• Other Records
• SMLLC Meetings and Resolutions
• Why Keep Good Records?

Appendixes

A.  Sample Operating Agreement for a California Single-Member Limited Liability Company (Manager-Managed)

1. Preliminary Provisions
2. Management Provisions
3. Membership Provisions
4. Tax and Financial Provisions
5. Capital Provisions
6. Dissolution Provisions
7. General Provisions
8. Signatures of Members and Spouses of Members

B. Resolutions for a Single-Member LLC

• Written Consent for Sole Member to Open a Bank Account and Borrow Money
• Written Consent Granting Authority to Sole Member to Purchase Real Estate
• Written Consent of Sole Member Granting Authority to Another Person
• Written Consent of Sole Member Rescinding Authority
• Written Consent of Sole Member Delegating Authority to Rent Business Space

C. Using the Downloadable Forms on the Nolo Website

• Editing RTFs
• List of Forms Available on the Nolo Website

Index

Chapter 1: LLCs and Business Structure Basics

Single-owner businesses have always existed in this country. Historically, they have been structured either as sole proprietor- ships or as single-shareholder corporations, both of which have certain drawbacks for small single-owner businesses. However, since the late 1990s, it’s become possible to organize these businesses as SMLLCs, a type of business entity which, for a single-owner business, has some advantages over both the sole proprietorship and the corporation. This chapter reviews those advantages and explains how organizing your business as an SMLLC may be the best option for you.

TIP
Every business has a legal structure. This includes everyone from a college student you pay to mow your lawn to an international telecommunications company you pay for cellphone service. The telecommunications company has likely organized as some type of formal business entity—either a corporation or an LLC. The college student, on the other hand, probably has not taken the trouble to file special documents to create a business entity, in which case he or she would be considered a sole proprietor (the default structure for a single- owner business).

Why an LLC?

Forming an LLC has become an increasingly popular way to create a formal legal structure for a small business. An LLC selectively combines some of the most desirable features of older, more traditional business structures like corporations, partnerships, and sole proprietorships. Those features include the limitation on personal liability that you get with a corporation and the pass-through taxation and flexibility of management that you get with a partnership or sole proprietorship. SMLLCs are LLCs with just one owner and they have the same combination of desirable features as multi-member LLCs. SMLLCs are specifically authorized by statute in every state.

LLCs Can Have Other Advantages

Protection from personal liability generally is considered the most important benefit you get from organizing your single-owner business as an SMLLC. Pass-through taxation and flexibility of management (which also apply to sole proprietorships but not corporations) are two other benefits. However, beyond liability protection, pass-through taxation, and flexible management, LLCs can have other, less commonly discussed benefits. Two worth mentioning are privacy and prestige. Privacy. There are methods you can employ to make it difficult for other people to know who actually owns your SMLLC. An LLC created and operated using these methods is sometimes called an anonymous LLC. At a minimum, the methods for creating and maintaining an anonymous LLC include using a separate company to act as your business’s registered agent, and not listing the name of your LLC’s (single) member on the articles of organization or annual reports. Additional steps may be necessary. These methods are permissible in some states but not others. That’s not necessarily a problem because you don’t have to organize your SMLLC in the state where you’ll actually operate. However, you will have to check around to find a state that has favorable LLC privacy rules. Also, be aware that with an anonymous SMLLC, you’ll have expenses that you might otherwise avoid—such as paying someone else to act as your business’s registered agent. Anonymity similar to what you can achieve with an anonymous LLC generally is not available when operating a sole proprietorship. Prestige. Many people believe that operating as an SMLLC, as opposed to a sole proprietorship, makes a business appear more impressive and reliable. In part, the idea is that if you’re taking the time to complete and pay for the initial filings, and then keep up with the ongoing paperwork and fees, people will perceive you as more committed to your business. You’ll have to decide for yourself whether this would be true in your particular case. Keep in mind that if you feel you don’t need protection from liability, you’ll have to balance the value of greater prestige against the initial and ongoing costs associated with having an SMLLC.

 

Furthermore, with the passage of the Tax Cuts and Jobs Act (TCJA), you may get up to a 20% tax deduction on the income you earn from your SMLLC. The 20% deduction applies to most SMLLC owners, although some limitations apply if you are providing services in fields such as health care, law, or accounting.

Forming an SMLLC can be relatively quick and simple. However, that fact alone shouldn’t stop you from wondering why you should give your small business a formal legal structure beyond the default structure of sole proprietorship. It’s a good question to ask. Not every small business, and certainly not every one-owner business, needs what an LLC has to offer. As just mentioned, sole proprietorships, too, have pass-through taxation and flexibility of management. Consequently, most business owners, and especially those who are sole owners, consider liability protection as the key issue in deciding whether to form an LLC. This chapter focuses on that particular benefit.

Protection From Personal Liability

If you are the sole owner of a small business and you choose not to give it any legal structure, your business will be considered a sole proprietorship by default. In turn, as a sole proprietorship, your business isn’t considered legally separate from you, personally. This means:

• debts for your business are also your own personal debts
• you, personally, are liable for any injuries your business causes to other people, and
• you, personally, are liable for damage your business causes to anyone else’s property.

By contrast, if you organize your one-person business as an SMLLC, you generally will not have personal liability for debts, injuries, or damage caused by your business.

So, with the liability issue in mind, what kinds of one-owner businesses can benefit by being structured as SMLLCs? The simple answer is: businesses where there is at least a small chance of significant liability. A few examples will make this clearer.

Example: Rosa has a degree in computer science. However, for the five years since finishing college she has worked nearly full time as an assistant manager at a retail store. She’s glad to be employed, but the job doesn’t pay enough and she never has a chance to use her computer skills. Six months ago, Rosa started doing freelance website development work from her home for several businesses in the state where she lives. Rosa does this as “work-for-hire” so that her clients own what she produces. On an hourly basis, Rosa earns a lot more from the freelance work than she gets from her assistant manager job. However, Rosa only has about a dozen hours of freelance work each week and it’s not clear if she’ll be able to get more work. Rosa has thought about formally setting up her web development business as an SMLLC. However, she isn’t sure she is ready to pay the $150 filing fee her state charges to set up an LLC. Rosa already has most of the hardware, software, books, and other supplies she needs to run her freelance operation, so there is little chance it will put her deeply into debt. Equally important, because Rosa does most of her work from her own home, at a computer, there is very little chance that her work will lead to someone being injured or someone’s property being damaged. Consequently, Rosa reasonably decides that, at least for now, it’s not necessary to set up her business as an SMLLC.

Example: Two years ago, Robert had a great idea for a new kind of baby stroller. He calls it the Carbo-Lite Carriage. The new design is made out of special lightweight carbon, making it easier than ever for parents to jog with their babies. (It also looks really cool.) After having built some prototypes on his own, and seen some local interest in the product, Robert now wants to hire a couple of part-time employees to help him ramp up production. He also wants to open a small local store to sell the stroller. Robert will need to get loans to make this happen. Up until now, Robert has thought of the stroller mainly as a pet project and has not given his “business” any legal structure. However, he recently spoke with an attorney who suggested that Robert set up Carbo-Lite Carriages as an SMLLC. As the attorney explained, Robert’s business will have various possible areas of liability:

• An employee could get hurt while working for Robert.
• A customer or a customer’s child might get hurt in the store, for example, by slipping and falling.
• Even though the stroller is very sturdy, there is a chance that a customer or child might be hurt because of some unexpected defect.
• While Robert believes his product is unique, it’s nevertheless possible that someone else could bring an intellectual property claim, for example, for patent infringement.
• It’s possible that, in spite of the initial interest Robert has seen, the stroller won’t ultimately sell well enough to be profitable and Robert would find he couldn’t pay back his business loans or other business debts.

Because of all these possible areas of liability, Robert takes his attorney’s advice and sets up Carbo-Lite Carriages, LLC, as a single-member limited liability company.

If you don’t establish your one-owner business as an SMLLC and instead leave it as a sole proprietorship, you’ll still have to pay taxes on business income, keep records for the business, and do nearly everything else you’d have to do if the business were an SMLLC. The most important difference between keeping your one-owner business as a sole proprietorship and forming it as an SMLLC is that, if you leave it as a sole proprietorship, you’ll leave yourself open to personal liability.

TIP
Every state has an LLC Act that lays out the state requirements for an LLC. If you’re ever wondering about the official rules for an LLC in your state, your state’s LLC Act is a good place to look for an answer. You can find each state’s LLC Act online by searching on the state name and “LLC Act.” Answers to many state-specific LLC questions also can be found on each state’s secretary of state (or equivalent office) website.

The “Novelty” of Single-Member LLCs

Both in general terms and also when specifically compared to multi- member LLCs, SMLLCs are a little unusual. Distinctive aspects of SMLLCs are apparent when it comes to basic LLC matters like operating agreements, member meetings and resolutions, personal liability, and taxation. In some cases, these distinctions result from the fact that many of the structural elements of LLCs are adapted from laws and rules for corporations, and those laws and rules frequently assume that businesses are owned and operated by more than one person.

Operating agreements. Where corporations have bylaws to help guide a group of directors, LLCs usually have operating agreements to guide multiple members. More specifically, two key purposes of an operating agreement for a multi-member LLC are to give all the LLC members a written document to refer to in case of an internal disagreement about the company, and to describe how different members will share in the company’s profits. However, with an SMLLC, which has just one member, there is no possibility of a disagreement among members and no issue of sharing profits. This doesn’t mean that you shouldn’t have an operating agreement for an SMLLC; it just means that the document may serve a somewhat different purpose than for a multi-member LLC. Operating agreements are covered in detail in the chapter on forming your SMLLC.

Meetings and resolutions. A similar novelty for SMLLCs relates to member meetings and resolutions. Just as corporations have shareholder and board of directors meetings, multi-member LLCs often provide for member meetings to make business decisions. And, when multi-member LLCs make big decisions, they commonly are documented in the form of resolutions. With SMLLCs, the sole owner has no other members to meet with and may not appear to have the same need to document decisions. Again, this doesn’t mean that, even if you don’t have meetings, you shouldn’t at least document major decisions for an SMLLC. Some of these issues are covered in more detail in the chapters on managing your SMLLC and keeping records for your SMLLC.

Personal liability. SMLLCs are sometimes looked at differently than multi-member LLCs when it comes to liability. In general, certain limits are placed on creditors trying to collect unpaid business debts from LLCs; or, conversely, trying to collect unpaid personal debts from individual LLC members. This might mean a creditor would be prohibited from collecting an unpaid LLC debt from the personal assets of an LLC member. It also might mean that a creditor trying to collect on an LLC member’s unpaid personal debt would be blocked from taking control and selling the assets of the LLC. However, in both of these situations, some states provide creditors of SMLLCs with more rights—more access to either personal assets or business assets. These matters are covered in the chapter on liability.

Taxation. SMLLCs are also taxed differently than multi-member LLCs. Both types of LLC are subject to pass-through taxation (meaning the LLC itself doesn’t pay taxes on business income; only the individual members do). However, while multi-member LLCs are taxed like partnerships, SMLLCs are taxed as disregarded entities (the same as sole proprietorships). This distinction, along with many other tax issues, is covered in more detail in the chapter on taxation.

Perhaps the ultimate evidence of the novelty of SMLLCs, as well as the slight uncertainty regarding their status, is the fact that by 1996 every state had laws allowing for LLCs but it took until 2003 before the last of the 50 states had updated their laws to specifically allow for SMLLCs. However, once that happened, the owner of an SMLLC formed in any U.S. jurisdiction could feel confident that the company—and its limited liability—would be recognized and respected in every other U.S. jurisdiction.

As you read through this book, it’s always useful to keep in mind that SMLLCs in many ways are a special case among LLCs generally.

TIP
Many states have LLC laws based on a model known as the Uniform Limited Liability Company Act (ULLCA). The ULLCA contains both suggested rules and explanatory comments about those rules. The ULLCA is periodically updated, though any single update usually involves only limited, incremental changes. Apart from your own state’s laws, which are the most important place to check for questions about what LLCs can and can’t do (and must and must not do), you sometimes can find additional guidance, including about SMLLCs specifically, from the comments in the ULLCA. You can find a copy of the latest version of the ULLCA online if you do a search for “Uniform Limited Liability Company Act.”

Business Structures and Personal Liability

While an LLC often is the most sensible legal form for a small business, it isn’t the only option. The other main choices are:

• sole proprietorship
• partnership, and
• corporation.

Each of these structures has unique elements. For example, a sole proprietorship can have only one proprietor, but a partnership must have at least two partners. As already mentioned, sole proprietorships and partnerships are not taxed separately from their owners (they are subject to so-called pass-through taxation), but corporations are taxed separately. In addition, there are variations on some of these structures, such as limited partnerships and S corporations.

Main Types of Business Structures
Type of Structure	Sole Proprietorship	Partnership	LLC	Corporation
Number of Owners	One owner (proprietor) maximum	Minimum of at least two owners (partners)	One owner/member (SMLLC) or multiple owners/members (multi-member LLC)	One or more owners/shareholders; most states allow one-person corporations
Limited Liability?	No limited liability; sole proprietor is liable for unpaid debts, injuries, and damage	No limited liability; partners are liable for unpaid debts, injuries, and damage	Limited liability; members are protected in cases of unpaid debts, injuries, and damage	Limited liability; shareholders are protected in cases of unpaid debts, injuries, and damage
Taxation	Pass-through taxation; sole proprietor pays taxes on business income as part of personal tax return	Pass-through taxation; partners pay taxes on business income as part of their personal tax returns	Pass-through taxation; members pay taxes on business income as part of their personal tax returns (members can elect to have the LLC taxed as a corporation)	Corporation pays corporate income tax (currently 21%) on net income and shareholders pay taxes on income they receive from the corporation
Management Flexibility	Flexible management; sole proprietor largely can do what he or she likes	Flexible management; partners largely can do what they like so long as they agree with each other	Flexible management; members largely can do what they like so long as they agree with each other (for SMLLCs, the single member largely can do what he or she likes)	Not so flexible; regular director and shareholder meetings and votes on major decisions required
Variations	No important variations	Limited Partnerships (LPs) and Limited Liability Partnerships (LLPs) (available mainly to professionals)	Single-member LLCs (LLCs with just one owner/member)	S-type corporations (corporations with pass-through taxation)

 

With a sole proprietorship, the owner is legally identified with the business and there is no personal liability protection if the business has unpaid debts, harms other people, or damages someone else’s property. The same holds true for a general partnership: The individual partners share liability with the business. By contrast, the owners of a corporation (who are the shareholders) are considered separate from the corporation, and generally are not responsible for the corporation’s unpaid debts or any harm or damage caused by the corporation.

TIP
In some cases, small business owners can benefit from the special way that corporations are taxed. However, that doesn’t automatically mean that the best option in those cases is to form the business as a corporation. Instead, it may make more sense to create an LLC and then elect to have it taxed like a corporation. There are more details in the chapter on taxation.

For small business owners seeking limited liability protection, an LLC usually is the best choice, in part because LLC owners:

• do not have to prepare and file separate taxes for the business apart from their personal tax returns, and
• are not by default required to hold and document regular owner (member) meetings.

However, for some small business owners seeking limited liability, a corporation may be a better choice than an LLC. This is true primarily for businesses that:

• have employees, including employee-owners, and want to provide those employees with the widest possible range of fringe benefits and incentives, and
• want to make it as easy as possible to attract outside investment, particularly through initial public offerings of stock (IPOs).

Unlike LLCs, corporations can offer employee-owners and other employees the widest available range of fringe benefits, such as various benefits related to health care. For employees of corporations, all of these fringe benefits are tax free, and they generally are also tax deductible for the corporation. Some of these same benefits would not be tax free if offered by an LLC to its members. On the other hand, keep in mind that LLC members who actively participate in the business are considered self-employed, and consequently are eligible for the self- employed health insurance deduction offered by the IRS. Therefore, at least when it comes to health insurance, LLC members can deduct 100% of their self-employed health insurance premiums on their personal tax returns. In short, employee fringe benefits, alone, usually aren’t enough reason to choose the corporation form over the LLC form.

TIP
There are a few basic rules for taking the self-employed health insurance deduction. Your health insurance policy must be in your own name or the name of your SMLLC. In addition, your business must have a net profit for the year. You typically report that profit on an IRS Schedule C. You enter the amount of the health insurance deduction on your personal Form 1040. For additional details on the deduction, check the instructions for Form 1040 and Schedule C, which are available on the IRS website.

Also unlike LLCs, corporations can offer stock options to prospective employees as an incentive to work for the company. On the other hand, multi-member LLCs can offer LLC memberships to employees as incentives. (Be aware, though, that LLC members are not employees but rather self-employed individuals with rights regarding the running of the LLC that employees don’t have.)

Finally, in contrast to LLC ownership, which is based on memberships, corporation ownership is based on shares of stock, so corporations can offer potential investors stock in the company, including different classes of stock with different rights. This is often more attractive than LLC memberships, particularly to public investors. However, most small business owners who are considering establishing their businesses as LLCs are not, and never will be, interested in taking their businesses public with IPOs.

TIP
If you want, you can change an LLC into a corporation. This is known as converting your business entity. In the majority of states, it has become easier in recent years to do entity conversions because of new streamlined procedures. Be aware, though, that—as mentioned above and discussed more fully in the chapter on taxation—a corporation is taxed differently than a typical SMLLC. Also, there’s information in Chapter 4 regarding the reverse process— converting from a corporation to an LLC.

CAUTION
The rules mentioned here are for standard C corporations, not for so-called S corporations. S corporations are a special type of closely held corporation. Among other things, S corporations can only have one class of stock and a limited number of shareholders. Also, unlike C corporations, S corporations have pass-through taxation (the S corporation itself doesn’t pay tax on net business income; only the individual shareholders do). S corporations are discussed in the chapter on taxation.

A more detailed review of each of the main types of business structures is beyond the scope of this book. However, Nolo publishes many books on starting and running all sorts of small businesses. Check Legal Guide for Starting & Running a Small Business, by Fred S. Steingold and David M. Steingold, The Small Business Start-Up Kit, by Peri H. Pakroo, and Form Your Own Limited Liability Company, by Anthony Mancuso. In addition, if you’re uncertain specifically about whether to establish your small business as an LLC or a corporation, check out LLC or Corporation? by Anthony Mancuso.

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