Single Member LLC Disadvantages
Limited Liability Companies are suitable for small business that has considerable transactions with potential liability. It combines the advantage of a sole proprietorship or partnership and a corporation. The LLC form provides flexibility in management and operations of the business as that in a sole proprietorship or partner and has the advantage of limited liability to business owners as that in a corporation. LLC can be formed with single or multiple members. Single member LLC has the same legal structure as a multiple member LLC. The entity has a separate legal existence from its member. In Federal taxation LLC does not have a separate tax classification. LLCs are classified as a sole proprietorship, partnership or corporation for federal tax purposes. The LLC can elect the classification under which it wants to be taxed.
The only disadvantage in a single member llc when compared to a multi member llc is that, when bankruptcy or dissolution occurs, the separate existence might become moot. Courts may rule either way based on the operational history of the company. For all other purposes the single member llc has a separate existence from that of its single member.
Setting up an llc is quite simple and straight forward. All business entities are constituted under state laws. Set up llc in accordance with the rules and regulations of your state or the state in which you wish to register your llc. Though the rules and regulations governing business entities may vary in each state, formalities and procedures for setting up an llc in most states are identical. You have to file the Articles of Organization and pay a fee for the filing. In some states an llc operating agreement is also a mandatory document and should be filed along with the articles of organization for setting up an llc. Certain states stipulate that a public notice be issued about the intent to form llc.
The Operating agreement is a crucial document in any llc, whether single or multiple member. The operating agreement should clearly state the member’s interests, rights and responsibilities, business policies and management functions. This document should clearly identify the LLC as a business entity with it’s owns rules and policies that distinguishes it from its member’s personal life. In a single member llc, having an operating agreement and operating the business in line with it is essential in establishing its separate existence. It will give the owner chance to prove its separate identity in a court when the need arises.
