Decisions, Decisions
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. Or, if you’re ready to get started, click the button below:
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.
Form an LLC
Law 4 Small Business. A little law now can save a lot later.
10 Comments
Thanks for the post. It is very helpful!
I have two questions:
Is a sole-member LLC the same as a single member LLC?
If the sole-member LLC is owned by a corporation, should the LLC chose to be treated as a corporation with Form 8832, or be treated as an disregarded entity?
Hi, there.
A sole-member LLC is USUALLY the same thing as a single member LLC, unless you’re dealing with a LLC that is owned by a married couple. In such instances, it will NOT be a single-member LLC (it will be a multi-member LLC owned by two people) yet the IRS will still treat it as a “sole-member LLC,” which means you can still take advantage of the disregarded status if that is your wish.
Regardless of who or what owns the LLC, it’s a tax question (i.e. consult with your CPA) on what is the best tax treatment for the LLC. I will say in general, most companies will treat the LLC as a disregarded entity, so its profits and losses pass through to the parent corporation.
Good luck to you. Larry.
H! I own an llc company. My sister is the cfo and my tittle is ceo/manager/ambr/sole member. Does that mean im the only that own the company?
Hi, Rebecca.
Titles in a company are not proof of ownership, and it’s possible that folks have titles without ownership.
Ownership is determined by the formation documents. If you have no formation documents (i.e. Operating Agreement), then things get really challenging — especially if the parties disagree. This is where you’re going to need to hire an attorney to look through all the facts and circumstances, and figure out what can be proven, argued and most importantly, won in court if it comes down to that.
Good luck to you. Larry.
Thanks for the post. I had another question – if a company is the sole member of an LLC, does this mean Company and LLC would be 2 separate entities with 2 separate sets of financial statements? Company and LLC are NOT one and the same entity, correct?
Hi, Jeff.
Great question, and while I think good minds could differ on the answer to this question, my answer is that you would NOT combine financials. The primary reason being the child company is the transacting company (with its own P&L), and the parent company is a holding company (a completely different business purpose) and therefore you wouldn’t want to combine financial statements.
I hope this answered your question. Thank you.
Larry.
My boyfriend and I own a Business together we have a sole member llc. The llc is in his name only. Does this mean I have no part in the ownership of the business? We did write meeting notes and added me in as a owner and we are both on the purchase agreement of the business we bought. Is there anything else that I need to do to insure that I am indeed part owner?
Hi, Julie.
Thank you for your inquiry.
Let me start by saying a “sole member” LLC means ONLY ONE PERSON owns the LLC. It appears your boyfriend is the sole owner, legally, based on what you’re telling me above; although it sounds like that is not your (or your boyfriend’s) intention.
If both you and your boyfriend agree that this LLC should be jointly owned by the two of you, then it’s important to do two things: (1) Revise the Articles to make it clear it is NOT a sole member LLC, and (2) to obtain an Operating Agreement that meets the needs of the business and the owners, indicating you and your boyfriend’s proper level of ownership.
If you and your boyfriend to NOT agree that this LLC should be jointly owned by the two of you, then you have a different problem: Forcing ownership somehow, and that will be very difficult (when you hear a lawyer say that, think “expensive”). It would turn into a debate / fight, and could irrevocably destroy your relationship. I assume you don’t want to go down this path, and therefore will not discuss it further.
Good luck to you. Larry.
In 2019 My husband and I opened an online business. I did file it as an LLC, I come up as the Sole Mbr with the IRS Dept. of Treasury ( with both of us as 50% Members ) since I did the paperwork. So, my question is, do I file it on my Income Tax or does he, or do we both? We are separated now, so we will be filing separate income Taxes. And is the business paperwork filed separate or is it going to be on our personal Income Tax? Please Advise.
Hi, Ida.
This is a great question, and a bit difficult to give you an accurate answer — only because this is really a CPA question version a legal question — and you didn’t say whether you’re being taxed as a disregarded entity, partnership or S-Corp.
Assuming a disregarded entity, then separated couples are still technically married and therefore would be “married filing separately”. The profits / losses of the company would need to be apportioned between the two of you and reported on your respective Schedule C’s. The separation will definitely make things more complicated.
If you’re a partnership or S-Corp, then K-1’s would be issued with the apportioned profit or loss.
Please consult with an account or CPA to help you figure out how to do this.
Good luck to you. Larry.