What is a sole-member LLC (or limited liability company)?
When it comes to Business Structure, there is a maddening array of choices. Each has its own costs, benefits and downsides. It would take pages upon pages to explain them all, but you can see our previous blog article on the subject.
One of the most popular forms of doing business is a Sole-Member Limited Liability Company (LLC). LLC’s are so popular, that we wrote a separate blog article on how to form your own LLC.
Whose LLC is it Anyway?
A “sole-member” LLC or limited liability company simply means a LLC is owned by one person. But what if you want to go into business with your significant other/husband/wife? This is where things get a little more complex.
If a married couple own a LLC, the IRS still treats the LLC as a sole-member LLC for tax purposes. However at the state level, the married couple’s LLC is considered a “multi-member LLC.” By treating a married couple owned LLC as a sole-member LLC, the IRS is allowing the couple to take advantage of the disregarded entity status a sole-member LLC can have.
To sum it up, a married couple’s LLC is considered a sole-member LLC federally, but is considered a multi-member LLC at the state level!
The moment another owner is introduced to a LLC, it no longer becomes a sole-member LLC, even with a married couple team.
Death and Taxes
When a LLC has one owner, the LLC does not have to file its own taxes, but the LLC still provides liability protection to its owner. Such a LLC is “disregarded” from an IRS perspective, and its revenues and expenses are reported as part of the personal income taxes of the sole owner. Do take note that using a LLC improperly in this scenario can lead to piercing the corporate veil. As a sole owner, you may be tempted to loosely operate the LLC, but don’t let your guard down.
Make sure you fully understand the implications of adding a partner to your LLC!
If you are the sole-owner of a LLC and you want to bring in a partner, you need to make sure everything is in order first. You should be particularly careful — make sure you (1) revise your current Operating Agreement and (2) put in writing how your new partner is “acquiring” his or her new membership into your LLC.
Finally, if you are running your business as part of a married-couple team, you should consider a strong Operating Agreement to deal with circumstances of death, incapacity and/or divorce. No one likes to discuss the worst case scenario, but planning now can ensure that your business survives. Putting these issues into the Operating Agreement (versus a will) will help streamline a transition for the business if you or your spouse (or both of you) are confronted with a life-changing event. See our article about Succession Planning for more information on this topic.
Law 4 Small Business. A little law now can save a lot later.