By definition, the owners of an LLC are known as members. As such, a Single Member LLC (SMLLC) simply refers to an LLC that has a single owner or member. SMLLCs tend to have a poor reputation, as judges in several states take a poor view of them. Judges have a higher chance of ruling negatively against SMLLCs and making the owner personally responsible for the LLC's debts. Judges commonly declare that the person and company are the same. This gives the owner personal liability for company debts, which makes the outcome similar to that of a sole proprietorship.
Who Uses SMLLCs
The most common group to use a Single Member LLC is a small business owner or a holding company. A small business owner could get around the issues of an SMLLC by selling or gifting 5 percent of the company to someone they know and trust. Generally, this is the threshold viewed as large enough to provide the benefits of an LLC with more than one member.
Each subsidiary within holding companies will also be Single Member LLCs. In this case, each member is the holding company itself. This has led to the adoption of sibling holding structures instead of a parent-child structure. Either model can work in Colorado, however. The fact that holding companies with subsidiaries are considered SMLLCs means that many e-commerce retailers and real estate investors are SMLLCs. So long as the parent company or holding company has multiple members, the fact that the subsidiaries only have one member will not affect personal liability, but will provide for easier tax preparation.
Popularity
Despite having a bad reputation, SMLLCs are one of the most popular formations. That is due to the fact that not everyone has someone they trust as a partner. Many other sole business owners are happy to work alone. Additionally, SMLLCs form by default during the creation of subsidiaries and a holding company. That fact increases the number of SMLLCs.
Operating Agreement
The operating agreement for an LLC is the contract between the members. Though not required, you should still have one even when there is just one member. The most important reason is estate planning. This prevents the company from being probated in a situation where you pass away and do not have a plan. Probate will eliminate effective management of the business, which will kill most small businesses. To avoid problems, our firm’s operating agreements include provisions for transfer upon death. This way, you can choose a beneficiary, and avoid the business interruption caused by probate. That, in turn, lets it bypass probate.
In addition, many banks require operating agreements, even for Single Member LLCs. These operating agreements are also helpful as a way to demonstrate ownership. They can additionally help in situations with a manager. An example would be if you buy real estate then hire a manager for property operations and open a bank account. In this situation, the operating agreement will outline actions the manager is allowed to take.
Taxes
With the IRS, the default status of an LLC is called a disregarded entity. With a disregarded entity, pass-through taxation occurs. This prevents the double taxation you would deal with as a corporation and allows the owners to pay taxes on their share of profits based on their personal tax situation.
Single Member LLCs can change their classification to c-corp, s-corp, or partnership taxation. Because of this tax flexibility, it is simpler to start with a limited liability company as opposed to a corporation. You should work with your accountant to determine if one of the various classifications is better for you. You must notify the IRS of classification changes within 75 days of receiving the EIN. This is done on form 2553.
Registration Benefits
SMLLCs have an unfortunate reputation due to how many states treat them. Luckily, Colorado stands out from the crowd and is more welcoming of SMLLC businesses. Even so, you must observe all corporate formalities. You cannot ignore best practices just because you are the only member of an LLC. It's important to obey formalities if you intend on enjoying the benefits of registering a business in Colorado. Even then, you will need to remain compliant. That means making sure you obtain the proper business licenses, properly file your articles of organization, and obtain an EIN. If you need help deciding on whether a single member LLC is the right choice, schedule a consultation with our attorneys through the contact link on our website.
