Single-Member LLCs - What You Need to Know to Protect Your Assets

Limited Liability Companies (LLCs) are a popular choice among business owners for their flexibility and protection of personal assets.

Single-member LLCs, where one person owns and operates the entire company, are a common type of LLC.

They offer unique challenges and opportunities when it comes to personal liability, tax considerations, and maintaining separation of personal and business assets.

In this article, we’ll explore these issues and provide practical tips to help you protect your assets and maintain your LLC’s good standing.

Keep reading!

Personal Liability

One of the primary benefits of forming an LLC is the limited personal liability it provides.

In general, an LLC owner’s personal assets are protected from the company’s debts and legal obligations.

However, there are instances where a single-member LLC owner might still be held personally liable.

Piercing the Corporate Veil

Courts may “pierce the corporate veil” and hold the single-member LLC owner personally liable if they find that the business was not operated separately from the owner’s personal affairs.

To avoid this, it’s important to maintain a clear separation between your personal and business finances, as well as following other best practices like holding regular meetings and maintaining proper records.

In Martin v. Freeman, the North Carolina Court of Appeals held the single-member LLC owner personally liable for a real estate deal gone wrong.

The court found that the owner had commingled his personal and business funds, and the LLC was essentially his “alter ego.”

Tax Considerations

A single-member LLC is considered a “disregarded entity” for tax purposes, meaning that the IRS treats it as a sole proprietorship.

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This means the LLC owner reports their business income and expenses on their personal tax return (Schedule C).

While this simplifies tax filing, it also means that the business owner pays self-employment taxes on their net business income.

Alternatively, a single-member LLC can elect to be taxed as an S corporation, potentially saving on self-employment taxes.

This requires filing IRS Form 2553 and adhering to S corporation requirements, such as paying yourself a reasonable salary.

Let’s say Sarah owns a graphic design business as a single-member LLC.

By electing to be taxed as an S corporation, she can pay herself a reasonable salary (subject to payroll taxes) and distribute the remaining profits as dividends, which are not subject to self-employment taxes.

Maintaining Clear Separation Between Personal and Business Assets

Maintaining a clear distinction between your personal and business assets is crucial in protecting your personal liability and maintaining your LLC’s good standing.

It is important to keep your personal and business assets separate because if they are not, you risk losing the limited liability protection that your LLC provides.

If a court determines that you have not maintained the separation between your personal and business assets, it may “pierce the corporate veil” and hold you personally liable for the debts and obligations of the LLC.

This means that your personal assets, such as your home, car, and personal bank accounts, could be used to pay back the debts of the LLC.

Additionally, maintaining a clear separation between your personal and business assets helps you keep accurate financial records and simplifies tax preparation.

By having separate bank accounts and credit cards for your business, you can easily track your business expenses and income, which will make it easier to prepare your tax returns and avoid any potential issues with the IRS.

Here are some tips to help you distinguish between business and personal accounts:

• Open a separate business bank account and credit card.
• Sign contracts and other legal documents in the name of the LLC.
• Keep detailed and accurate records of your business transactions.
• Hold and document annual meetings, even if you’re the only member.

9 Tricks to Protect Your Single Member LLC’s Assets

Here are some practical tips for maintaining your company’s good standing and avoid legal pitfalls:

1. Register your LLC with the state and keep your registration up-to-date.

2. Obtain any required licenses and permits.

3. Set up an operating agreement to lay out how your LLC will be run, including how profits will be distributed, who has decision-making authority, and how disputes will be resolved. Having a clear operating agreement can help prevent misunderstandings and disagreements down the line.

4. File and pay your taxes on time.

5. Keep your personal and business finances separate.

6. Maintain proper records, including meeting minutes and financial documents.

7. Keep up with compliance requirements to maintain good standing as an LLC. Make sure you’re aware of these requirements, such as filing annual reports or paying franchise taxes, to avoid falling out of good standing and losing your limited liability protection.

8. Purchasing liability insurance can provide you with an extra layer of protection beyond the limited liability offered by the LLC structure.

9. Use contracts to help define and limit the liabilities and responsibilities of each party involved in a business transaction, reducing the risk of disputes and legal action.

By implementing these strategies, you can further safeguard your personal assets while running your single-member LLC.

In Summary…

As a single-member LLC owner or aspiring entrepreneur, it’s essential to understand the unique challenges and opportunities that come with this business structure.

By being diligent about personal liability, tax considerations, and maintaining separation of personal and business assets, you can protect your assets and set your business up for success.

Don’t let legal pitfalls derail your entrepreneurial journey…

Educate yourself and take action to ensure your single-member LLC thrives.

You’re not alone.. Business Initiative is here to help you through this process!

Schedule a consultation call and let’s make sure your assets are secure!

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