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Is it Bad to Be a Single Member LLC?

Attorney Thomas B. Burton answers the following question: Is it Bad to Be a Single Member LLC?

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"Is it bad to be a single-member LLC?"

Hello! I'm Attorney Thomas Burton. I'm an estate planning and business law attorney here in Wisconsin and today's question is exactly that - is it bad to be a single-member LLC?

You may have heard out there with an LLC which is a limited liability company, can be an LLC that has a single member or you can be what we call a multi-member LLC and the member of an LLC is the owner of the LLC interest.

A single-member LLC may hear the IRS refer to it as taxed similar to a sole proprietorship. That's because, a single-member LLC is a disregarded entity meaning all of the income and expenses from the LLC, flow through to the individual owner's tax return as flow-through taxation.

A multi-member LLC by default is a partnership and must file a partnership tax return, Form-1065 and then a K-1 is issued to each member reflecting the profits or losses from the business.

So my answer would be, it's not bad to be a single-member LLC, in fact, there are some advantages of being a single-member LLC, such as the ability to operate from a tax standpoint similar to a sole proprietorship, meaning you don't have the ongoing tax compliance cost of filing a separate tax return for the business entity. You can report the business income or loss on a schedule to your individual tax return. A lot of times for a small business, you'll use Schedule C to report the business income and expenses.

Now, I've seen this question rise, is it bad to be a single-member LLC in other contexts, in other people feeling that they may lose some of the limited liability protection of an LLC if they don't have another member. Now I can't speak for other states but when I see this question arise, I sometimes see it in other states. In Wisconsin, in my opinion, we have fairly well-established in statutes and case law that you can be a single-member LLC and maintain the limited liability protection of an LLC.

Back in the day, sometimes people would add a member as a minority member simply so that they could say they weren't a single member, they had some member but that member had a two percent interest or five percent interest. In my opinion, unless you have a really compelling reason to do that and you want to incur the tax class to file Form-1065, a partnership tax return. The support for doing that out of a concern that you're going to lose the liability protection, piercing the corporate veil you may have heard, I don't think is warranted.

So single-member LLCs are valid in Wisconsin, lots of people operate them and they're a very common way to separate your business liability from your personal liability by setting up that separate corporate entity.

Now what you need to make sure you do is observe corporate formalities, and keep your business assets, books and Records separate from your personal assets that's why I always recommend to my clients you open up a separate business bank account, you keep your business books and records and you keep all of the required records under the Wisconsin LLC statutes that the business is required to keep. Such as the list of members, the operating agreement, the articles of organization, and tax returns.

So if you're following the other steps laid out in the statutes, operating as a single-member LLC, in my opinion alone does not expose you to more liability than just adding some minority member, and again, that was a concern early, LLCs first came into existence in the 1980s and before when some of the early statutes were written, that was some of the concern. Now there's still a relatively new feature in Wisconsin and we don't have a Wisconsin Supreme Court president on all these various issues related to LLCs. But as of right now, single-member LLC is definitely an available entity and can be used both to limit your liability and still gain that flow-through taxation, similar to a sole proprietorship in the state of Wisconsin.

In short, is it bad to be a single-member LLC, I would say, no, it's not bad, it can be good, again, it depends on your situation and what you're looking to do with your LLC and your goals.

A great question, and thank you for asking, thank you for tuning in and we'll see you next time.

© 2023 Burton Law LLC. All Rights Reserved. Transcript and captions provided for ease of access for the hearing impaired. For questions about this topic, or to suggest a topic for a future blog post, please contact the office.

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