The dangers of doing business as a single member LLC. John Kiritsis, Esq. Phone# 212 922 0005
Running your business organization as a single member LLC (Limited Liability Company), could potentially expose both the company and its underlying owner/manager to a whole range of possible with regards to asset protection, tax ramifications, and management structuring.
Broad Overview.Single member LLCs could potentially expose their sole member owner to personal liability. This is in large part a function of many statutory LLC laws and well rooted legal principles rooted in common law partnership laws. The way this may be manifested is somewhat along the lines of the following: Although, members of an LLC would typically not be liable for the debt obligations of an LLC, the managers of an LLC could be liable under many circumstances for the LLC debts, by nature of dispensing their manager duties for and by the LLC. If the single member LLC is also the manager of the LLC (as would virtually always be the case), then such party may unwittingly be subjected to personal liability exposure. It should be noted that this legal conundrum may may manifest itself, irrespective of whether the single member LLC style itself as a member managed LLC or a manager managed LLC.
Moreover, as far as, tax considerations go -- A single member LLC may be legally unable to take advantage of many tax benefits and/or tax avoidance strategies that could be available to non-single member LLC. It is also worth noting, that a single member LLC, would frequently be unable to pass-through LLC incurred tax losses to its underlying sole member. In addition, in many situations, a single member LLC may be exposed to a potentially higher tax audit risk rate.
Ways to address the potential dangers.Although, the aforementioned should give someone considering to have a single member LLC, some serious pause and possible reflection with regards to going through the single member LLC route -- It is also worth noting that all of the possible dangers that may have been mentioned above, can be easily addresses through some legal structuring and tax planning, when first setting up your single member LLC.