Do Single Member LLCs Provide Limited Liability Protection?
One of the single most important reasons why people form business entities is liability protection. In the eyes of the law, single member limited liability companies, despite having only one member, provide the exact same protection as limited liability companies with more than one member.The confusion that single member LLCs do not provide the same liability protection stems from the tax treatment of single member LLCs. Single member LLCs are treated as disregarded entities in the eyes of the Internal Revenue Service and thus are not required to file separate tax returns. Instead, the single member provides for the LLC on their own personal tax returns. From a tax standpoint, a single member LLC is not differentiable from the individual that owns it. Income and loss of a single member LLC is simply reported on a taxpayer’s Schedule C.
However, from a legal standpoint, a single member LLC is entirely separate from the individual that owns it, thus allowing the member to enjoy liability protection. Section 17101(a) of the Beverly-Killea Limited Liability Company Act provides that ,”no member of a limited liability company shall be personally liable under any judgment of a court, or in any other manner, for any debt, obligation, or liability of the limited liability company, whether that liability or obligation arises in contract, tort, or otherwise, solely by reason of being a member of the limited liability company.” The statute does not differentiate between the liability protection provided to a member of a multi-member LLC and a single member LLC- they are the same in the eyes of the law.
There has been a trend to avoid the single member LLC by adding a second member with a 1% membership interest in the LLC. This achieves the useless goal of having a multimember LLC while also causing additional administrative hassle. The 1% membership interest is responsible for preparing and filing a K-1 despite having a miniscule interest in the company.
It should be noted that regardless of the number of members, a member of a LLC is also subject to personal liability under an alter ego theory in the same circumstances and to the same extent as a shareholder of a corporation.
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