Setting Up a Single-Member LLC - dummies

By Jennifer Reuting

If you’re planning on being the only member of your limited liability company (LLC), your LLC will be designated as a single-member LLC (SLLC). Several states’ courts have ruled that single-member LLCs don’t offer the dual-layer of liability protection, called charging order protection, that regular LLCs offer.

And unless you’re completely diligent in your record keeping and dot every i and cross every t, SLLCs can also lack the basic liability protection that an LLC offers — protection that is one of the LLC’s fundamental benefits.

Keeping your SLLC’s liability protection

Although in some states single-member LLCs don’t offer the same peace of mind as multiple-member LLCs, you can still take steps to ensure the basic liability protection that a multiple-member LLC or corporation offers — that which protects your personal assets if the company gets sued.

This process can be somewhat tedious, though, because you must be rigorous in making sure you file everything correctly, and you have to go above and beyond to treat your entity as though it were truly separate from yourself.

To keep the liability protection in your SLLC, do the following:

  • Elect corporate tax treatment on IRS Form 8832, Entity Classification Election. When you elect corporate tax treatment, you’re automatically saved from being considered a proprietorship by the IRS. Head to Chapter 8 for details on electing a tax status.

  • Be diligent about keeping your business assets and cash flow completely separate from your personal assets and cash flow. You must have documentation to this effect. In other words, no using that business credit card on that personal shoe splurge at the mall.

    If, as a single-member LLC, you claim a home-office deduction (IRS Form 8829, Expenses for Business Use of Your Home), your home can theoretically be considered a business asset and be seized if you lose a lawsuit.

  • Sign all your filings as owner, on behalf of your LLC. Never sign any business documents without this designation.

  • Add your federal EIN and your LLC’s filing number (provided by the Secretary of State) to your Schedule C. Adding your LLC’s file number makes your LLC look much more legitimate and can deter those looking for a lawsuit.

  • Act like a corporation. This approach involves complying with all corporate formalities, such as having meetings of the members and managers, keeping extensive minutes, and passing resolutions. Even if you’re the only person involved in your LLC, don’t think you can get out of these tasks. Having a meeting with yourself may seem silly, but doing so is necessary to document all decision making affecting the company.

Being a multiple-member LLC doesn’t make you exempt from having to abide by these same formalities. These are simply good business practices that help you prevent the courts from classifying your company as an alter ego of yours and removing that barrier of liability protection. Single-member LLCs, those entities without any additional partners, are more at risk for having their companies disregarded by the courts.

Creating an operating agreement for an SLLC

Is your LLC a single-member LLC owned only by you? Although it may go against common logic that you need an operating agreement — after all, why would you need to create your own rules just for yourself? — having one is even more imperative for you, the single-member LLC owner. If you’re ever taken to court, your operating agreement will help ensure that your personal veil of limited liability remains intact.

The operating agreement for a single-member LLC isn’t much different from that of a regular LLC with multiple members. In most places, you simply change the verbiage, replacing “Members” with “Member” (singular).