What is a Single Member LLC?
A single member LLC (SMLLC) is simply a limited liability company that has only one member. Under current IRS rules, unless the single member LLC elects to be treated as a corporation, it is disregarded for Federal income tax purposes. That means if the only member is an individual, all of the income and expenses of a business operated as a single member limited liability company will be reported on a Schedule C attached to the individual’s Form 1040. If the single member is a corporation or partnership, the SMLLC’s income and expenses will be aggregated with the other income and expenses of the corporation or partnership and reported on that entity’s tax return.
When states originally enacted their LLC statutes, organizing a limited liability company typically required that there be two or more members. SMLLCs were not allowed. An individual wanting to form an LLC needed to add another person in order to take advantage of this newly-available entity.
Gradually states began to adopt amendments to their LLC acts that permitted limited liability companies with only one member. Even if your state allowed the formation of SMLLCs, however, there was a question whether states that still did not permit SMLLCs to be formed in their state would recognize SMLLCs formed in other states where they were permitted.
Fortunately, all 50 states and the District of Columbia now permit SMLLCs, so that issue is no longer a concern.
There is some lingering worry among legal analysts as to whether a member of SMLLC will be given the same protection from liability as a member of a limited liability company with multiple members. In most states, the statute appears clear, but it may take many years for case law to develop to the extent that some lawyers will have the comfort level that they have from decades of case law on one-shareholder corporations. In the end, it seems probable that a member of a SMLLC will have no less protection than a sole shareholder of a corporation. (There is one circumstance, however, where a multiple member LLC holds a distinct advantage over a SMLLC — protecting the assets of the LLC from the creditors of the member – with respect to charging orders against the LLC by the creditors of the member. See Single Member LLC or Multiple Member LLC?.)
There are some differences between SMLLCs and other LLCs, and a member of the LLC should be aware of them. For example, in Illinois, the operating agreement of a manager-managed single member limited liability company must be in writing if the manager is the same person as the member.