What You Should Know About Single Member LLCs

What You Should Know About Single Member LLCs
by Tom Bouman

1.         What is a Single Member Limited Liability Company?
 

The limited liability company (“LLC”) is a common form of business entity ownership in Arizona and all other states.  Each owner is referred to as a member; thus, a single member LLC has only one owner.  The general intent behind the LLC is to encourage business development and investment by offering enhanced creditor protection to its members.  However, an active business is not required; rather any person may transfer personal assets to a LLC and may qualify to receive the same benefits as a business owner.

A single member LLC is sometimes referred to as a “naked LLC” because of its limited ability to protect assets from seizure by a creditor of the member.  As a general rule, a multi-member LLC provides stronger protection than a single member LLC.

A single member LLC may own almost anything.  The most common assets held by an LLC are investments such as business property, brokerage accounts and rental properties.

A single member LLC is a disregarded entity for income tax purposes.  Any taxable income is reported by the member of the LLC.

2.         What are the benefits of a Single Member LLC?

First, the member can isolate company liability from personal liability.  If the company is legally responsible for a harm caused to another person or property, the creditor should only be able to enforce a judgment against the company assets and not the member’s personal assets.

Second, the member can isolate company debt from personal debt.  If the company is legally responsible for a debt – generally due to business failure – the creditor should only be able to collect against the company assets.  The member’s personal assets are protected.  Of course, this benefit is irrelevant if the member personally guarantees a debt.

A third potential benefit is protection of the LLC assets from seizure by a creditor of a member. 

3.         Will a LLC protect assets from seizure by a creditor?

Maybe.  The answer may first depend on where the LLC is registered.  Although all states have LLC statutes, one state may have better protections than another.          

The more protective state laws (including Arizona) provide that a charging order is the only remedy a court can use to seize assets from a LLC.  This means that any distributions otherwise payable to the debtor/member must instead be paid to the creditor, but a judge cannot order a distribution of assets.  However, less protective state laws provide that the creditor can foreclose on the LLC membership interests.  State laws also differ about whether a creditor has access to the books of the company or whether the charging order constitutes a lien on the member’s interest.  In sum, the choice of where to register the LLC is a huge factor in determining how much protection a LLC provides.

Another factor is how many members the LLC has.  A single member LLC is vulnerable because the charging order protection was intended to protect innocent members.  If there are no innocent members, the theory is hard to rely upon.  At least one state – Wyoming – has attempted to protect the single member LLC by statute, but even this protection is debatable.

For maximum protection, a single member LLC should be registered in a state where creditor rights are very limited by state statute and be subject to a restrictive operating agreement.  The operating agreement should carefully restrict the rights of a creditor seeking to enforce a judgment against a member.

4.         Who should be the single member?

Typically the single member will be an individual person, although a married couple also qualifies.  If the member’s estate plan includes a revocable living trust, the trust should be named as the member.  In some cases, another business entity will be the single member.

The assets of a single member LLC may be managed by the member (aka “managing member”), or by a separate manager.

5.         How much does a single member LLC cost?

In Arizona, anyone can establish a single member LLC by filing Articles of Organization with the Arizona Corporation Commission.  The fee is $50 (or $85 expedited), plus the cost of publishing the articles in a local newspaper.  Fees in other states are comparable.  Self-help companies will handle basic set-up for a few hundred dollars more, or an attorney can provide legal counsel and handle the documentation from start to finish for about $500 to $1,000.  When a restrictive operating agreement is appropriate, an attorney might prepare a customized document for $1,500 to $2,500.  


About the Author

Thomas J. Bouman provides legal counsel in the areas of estate planning, estate settlement, and asset protection.  He brings a highly systematic approach to the practice of law, which is critically important when wading through the complex, and often bizarre, legal requirements associated with estate and trust law.  Mr. Bouman is author of the Arizona Estate Administration Answer Book and a prominent member of Wealth Counsel, LLC, the nation’s premiere organization of estate planning attorneys.

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Thomas J. Bouman
Attorney - Author - Speaker

www.TomBoumanLaw.com
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