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
Book an Appointment online 24/7
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(520) 546-3558

"No matter what you achieve, somebody helps you."  Althea Gibson

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You need to get creative.

An FLSA workweek is a fixed, regularly-recurring period of 168 hours – that is, seven, consecutive, 24-hour periods – that the employer expressly adopts in order to maintain FLSA compliance.

An employer can have multiple "workweeks" for different departments/groups/individual employees based on tendencies and work patterns of various groups and departments. In other words, a "workweek" does not have to be Monday through Sunday.

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A friend from Texas told me about his recent experience: "I recently resigned from my job and secretly recorded the exit interview. During the interview, the HR director threatened to withhold my last paycheck unless I signed a non-compete agreement. I told her the threat was unlawful and that I was recording the conversation. She became enraged and screamed 'get out of my sight! I hope I never see you again for the rest of my life!'"

National Right to Work Act

Senator Jim DeMint (R-SC) has introduced a bill in the U.S. Senate, the purpose of which is to "preserve and protect the free choice of individual employees to form, join, or assist labor organizations, or to refrain from such activities."

You can read the bill here.

Personal E-mail Accounts at Work

Assume your employer doesn't monitor your gmail, yahoo or other personal e-mail account when you log in to personal accounts from a work computer? Don't assume anything...if you need to communicate important personal information to someone while you are at work, push the keyboard away and pick up your telephone.

Non-Compete Step Down Provisions Part II

As mentioned in Part I, a covenant not to compete is generally enforceable as long as it is no broader in time or scope than necessary to protect an employer's legitimate business interests. The burden is on the employer to prove the extent of its protectable interests, and if it cannot, the entire covenant will be deemed unenforceable. If either the temporal or geographic scope is unreasonable, then the entire covenant is unenforceable.

In attempts to craft the most restrictive covenants that courts will enforce, employers are using "step down" provisions in covenants not to compete with increasing frequency. Before I explain step down provisions, you need to know about the "blue pencil" rule. Arizona's "blue pencil" rule empowers courts to cross out over broad, unreasonable provisions in an agreement while keeping in place less onerous, enforceable ones. Step down provisions simply provide the parties with several scenarios that may be found reasonable.

Here's an example of a step down provision I recently encountered while negotiating the terms of a client's departure from a company that he co-founded:

"Non-Competition Period" means a period of five years following the date of this Agreement, unless a court determines that that period is unenforceable under applicable law because it is too long, in which case the Non-Competition Period shall be for the longest of the following periods that the court determines is reasonable under the circumstances: four years, three years, two years, eighteen months, fifteen months, twelve months, nine months or six months.

There is no Arizona state court guidance on whether step down provisions are lawful. However, the District court in Compass Bank v. Hartley, 430 F.Supp.2d 973 (D. Ariz., 2006), stated that under the circumstances of that case: "the Court finds under limited circumstances carefully crafted that step-down provisions are a permissible application of Arizona's bluepencil rule, if they permit a Court to crossout some unreasonable sections in favor of more reasonable ones without rewriting them. Unlike Varsity Gold where the parties did not know what a reasonable provision would include, step down provisions provide the parties with several scenarios that may be found reasonable. In this sense, it affords parties an opportunity to contemplate several options at the time the contract is signed. If a court subsequently finds the covenant unreasonable and uses the step-down provision to amend the covenant, such a modification is not significant because it has already been contemplated. Thus, there was a meeting of the minds at the initiation of the contract with regard to the alternatives presented by the step-down provision. On the other hand, if the alternatives presented are indefinite and inconsistent with the underlying provision, and are not easily severable from unreasonable provisions, there is no meeting of the minds and the covenant is invalid."

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Employers face challenges when managing claimed health-related absences and leave. Of course, employers have legitimate and important interests in prohibiting excessive absenteeism and abuse of sick-leave policies, and though it seems natural and obvious for employers to ask about the circumstances of a health-related absence to verify the validity of the absence, such inquiries may run afoul of the ADA (Americans with Disabilities Act) according to the recent ruling in EEOC v. Dillards.

The court's ruling in Dillards suggests that questions about an employee’s reasons for taking sick leave--unless they are carefully limited to inquiring about an employee's ability to perform his or her job duties--may be an improper inquiry into an employee’s disability.

The ADA provision at issue states:

"a covered entity shall not ... make inquiries of an employee as to whether such employee is an individual with a disability or as to the nature or severity of the disability, unless such examination or inquiry is shown to be job-related and consistent with business necessity." Nonetheless, "[a] covered entity may make inquiries into the ability of an employee to perform job-related functions." 42 U.S.C. § 12112(d)(4)(B).

In light of the Dillards case, a best practice for employers is to limit health-related inquiries to an employee’s ability to perform his or her job responsibilities.