If you run your business through an LLC, but you are a single owner, you will need a company operating agreement. This is because you expose yourself to greater chance of losing your personal liability protection without one.

MORE RISK OF PERSONAL LIABILITY FOR A SINGLE MEMBER LLC

The same liability protection for multiple-member LLCs is available to single-member companies under the law. The problem is that the single member entity runs a higher challenge risk in a court of law. Many single-member owners have been shocked to find out that they have lost personal liability protection because they failed to operate their LLC entity in the proper way.

Under the law, LLCs must be run by themselves, not the owner personally. Since single owners have no one to answer to, there is a risk that the person who creates an LLC may ignore the legal entity status while actually running the business.

Even if you do run your business properly, aggressive lawyers can work to convince the court that your are running the business personally and not as the LLC itself. Claims of this type are called “piercing the veil”. One way to protect yourself against this kind of claim is by having an operating agreement properly filed. You must also follow the requirements of the operating agreement to ensure your protection.

ESTABLISHING SEPARATION WITH AN OPERATING AGREEMENT

There must be sufficient provisions in the LLC Agreement to ensure the LLC is a separate and distinct entity from the actual operator of the business. Because of this, you must at least include a provision that requires votes of the owners to be taken on major decisions.

The procedures in the operating agreement must be followed by the single member when running the business. You should document your compliance with particular provisions regularly to protect yourself. Proper documentation will help you to show that the owner acts separately and distinctly from the business. This is important, should there be a challenge in court.

COMPLIANCE IS EASY BUT NECESSARY

The paperwork obligations to comply with the operating agreement are not difficult. You can keep up with your paperwork easily by using Written Consent.

A single owner cannot use written consent unless the LLC Operating Agreement has provision for it. Including a Written Consent provision will let you vote and act through an uncomplicated written approval form. Using this kind of form lets you easily meet your obligations to show sufficient independence and maintain the protection against personal liability.

A single member LLC is different from a multi-member company because there is no need to collaborate among owners. So, the same level of checks and balances regarding governance is not required.

However, the risk of personal liability is greater and so having an appropriate operating agreement and knowing what you should do each year to document and prove the separation of owner and business is essential.

If you would like more details on exactly how to do this, visit our site at TheLLCExpert.com which has more articles for the Single Member LLC and offers a Single Member LLC Operating Agreement Package with step by step instructions on how to preserve your protection.

The LLC v. S Corporation dilemma is one that many new business owners come across when choosing a business entity.

An S Corporation Is a Tax Status

It is important to first understand that an S corporation is not a legal entity in the same way that as an LLC, a corporation or a limited partnership entity.  An S corporation begins as a general corporation under state law.  The “S” is really a tax characteristic under the Internal Revenue Code.  So when you are looking at your state laws for different entity requirements, you will not find the S corporation in the corporations and legal entity statutes.

What this translates to is that the only reason to be an S corporation is for tax purposes.  An S corporation is a corporation under state business organization law and subject to the same formalities and requirements as a corporation. The corporation generally has more legal mandates and a less flexible structure when it comes to business operations.

An S Corproation Has Limitations and Conditions

Also, from a tax perspective, the Internal Revenue Service imposes a laundry list of requirements and limitations for an S corporation to meet in order to qualify for a single layer of taxation.  On the other hand, the IRS automatically qualifies a limited liability company for such single layer of taxation without any requirements of an election or additional restrictions and limitations.

These restrictions and limitations must continually be adhered to and any deviation, even if it is accidental, will result in loss of S status.  A loss of S status usually means triggered tax obligations and sometimes penalties and fees. One benefit of the LLC is that you, as a busy business owner, do not have to worry about these.  It is one less set of legal compliance requirements you need to keep up with as your business evolves.

While many of these restrictions and limitations may not seem to onerous when starting a business many businesses have later found them to negatively affect their ability to grow or take on financing in later stages. It is sometimes difficult later to unwind an S corporation status if it is needed for business reasons.

An S Corporation Is Subject to Same Formalities and Requirements as a General Corporation

A corporation is simply not as flexible as an LLC when it comes to operations and ownership matters.  The corporation statutes structure a corporation with a required board of directors and standard stock ownership.  The LLC can alter the legal default structure of an LLC by agreeing to different arrangements in an LLC Operating Agreement.

From a non-tax perspective, the LLC clearly provides a lot more simplicity and flexibility which is important to a small business.

An LLC Can Choose S Corporation As Well for Tax Purposes

From a tax perspective, there is a difference between a default LLC tax structure (which is known as a pass through) and an S corporation tax structure.  Both offer a single layer of taxation but there are some technical and sometimes complex differences when it comes to specific tax matters like the ability to take losses, the ability to allocate tax items to owners, and self employment taxes.

Now, having said this, one thing that many do not know. .  even some accountants do not know. .  is that an LLC can choose an S corporation tax structure if it desires.  It requires meeting the same laundry list of requirements and making an election.  But bottom line here is that a limited liability company can have all the state law advantages of an LLC but be taxed exactly like an S corporation if this is more suitable.

The S corporation does not have this flexibility in choosing tax structure.  The LLC is a newer entity in which both state lawmakers and the federal government (Internal Revenue Service) made it a goal to be most suitable for a small business owner.

One of the many reasons that S corporations are still popular is because accountants are used to using S corporations as they have been around longer and so they advise their clients to use them.  Many of these professionals have not kept up to date on the tax rules applicable to the limited liability company.  Now, in some situations using corporation that has elected S corporation status may be preferred but make sure that the person advising you is experienced in both types of legal entities when conducting this analysis for your situation.

We get questions all the time asking about the quality of various incorporation services (including LLC formation) available to business owners.  A recent inquiry asked about BizFilings which is one of the leading LLC formation services on the Internet.

While I do not generally provide reviews in this LLC Answers blog, BizFilings is one company that I can endorse based on my actual knowledge and relationships with the company.

First, it has been around much longer than most online businesses.  It was started in 1996 and was purchased by Wolter Kluwer, a billion dollar legal services and publications company serving the law firm and attorney market.

BizFilings has remained a separately run company focused on providing incorporation services and other related products to small business owners.  They have their owner management team and a staff of extremely well trained customer service representatives to help any new business owner through this process.

GO TO BIZFILINGS NOW

When it comes to competency and legal compliance, BizFilings offers a compliance guarantee.  However, you can gain even more confidence in their service because its sister company, CT Corporation, also owned by Wolter, is the primary service provider of incorporation services, registered agent and other governance services to the nations largest law firms and in-house corporate legal department.

BizFilings has really become the business of choice for legal entity formations because they have combined the entrepreneurial spirit and customer focused obsession of the original BizFilings with the unparalleled corporate legal expertise and experience of Wolter Kluwer and CT Corporation.

If there is anything you should insist upon when starting a new business, it is ensuring that you have a proper and compliant incorporation or LLC formation.  It is the legal entity that provides you with liability protection and in order for a corporation or LLC to exist, it must be completely and properly organized. So, make sure you entrust this requirement to a competent lawyer or incorporation service.

While I had a lot of interaction with CT Corporation when I worked at large law firms and served as General Counsel for two companies, I also have worked with BizFilings management and have been extremely impressed with their pulse on small business and the quality of their small business services.

BizFilings offers several package levels so check the details and inquire about turnaround times to make sure you get the right one for your needs.