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.

Today, a well know legal professor (expert in business organizations law) filed a brief in a landmark Florida case that addresses a fundamental single member LLC matter. If the court agrees with his position, this could mean the definitive end to any charging order protection for the single member LLC.

State LLC laws have never differentiated between a limited liability company that has one member and one that has multiple members when it comes to liability protection.  It is well recognized that every LLC provides a layer of protection stating that owners are not personally liable for business liabilities merely because they are owners.  This is known as forward liability protection.

However, an LLC in most states also offers what is known as reverse liability protection or charging order protection.  This protection basically states that if a member is personally sued for a non-business related obligation and is found liable, the creditors cannot take full ownership of the member’s LLC interest in the LLC.  The creditor’s rights are limited to the economic interests.  In effect, this allows the member to retain the control he had in the LLC business.

The philosophy behind the charging order is not really to give protection to the liable member but to protect other owners of the LLC from business disruption and problems.  They should not fall victim to one member’s personal liabilities by having to deal with an unknown creditor coming in and affecting the business by having management or voting rights.

Now this reasoning does not really apply in a single member LLC context because there are no other members to protect.  A well known bankruptcy court has nullified charging order protection in a single member LLC in the context of a bankruptcy.  While conservative legal practitioners interpreted this ruling to mean there is no longer charging order protection for a single member LLC, the ruling technically applied in only a bankruptcy context.

However, this Florida case addresses the matter in a non-bankruptcy circumstance and so its conclusions will have significant ramifications and applicability in the general area of LLC protection.

More details can be found at this link:

http://www.wmitchell.edu/news/articles/default.asp?articleId=11766&story=Professor-Kleinberger-files-brief-in-landmark-Florida-single-member-LLC-asset-protection-case

Well, the answer to this is because the way the limited liability company laws are set up, a single member LLC is still a separate legal entity from its sole owner.  As a result, it needs to have its own personality and be its own person.

If there is no evidence like a single member LLC agreement and other paperwork, then there is a chance that a judge in a lawsuit may say that the single member LLC was never really honored by the owner as an independent entity running a business.This is bad for a reason:

One of the biggest vulnerabilities of a single member LLC is that someone suing it may argue that the single owner should be personally liable for the liability in question. This is called piercing the protection veil.  While there is not a lot of published case law evidencing when someone has prevailed with this argument, this concept has been well developed in the corporation case law.

Given that corporations have similar asset protection laws, it is a recommended action to see what preserves protection in the corporate arena and apply it to the single member LLC.

The better decision is to have a single member LLC operating agreement and for the single owner to engage in simple governance with his or her LLC to clearly establish that the limited liability company exists and is the separate entity running the business.

The laws are clear that a single member LLC is a good vehicle for asset protection from creditors assuming that the creditor does not require that the member sign a legal agreement agreeing to personally guarantee the liability in question.

The LLC Expert sells a SINGLE MEMBER LLC OPERATING AGREEMENT PACKAGE which includes a single owner specific LLC agreement form and a standard governance consent that can be used to easily maintain written governance approvals for major actions.  This can make the differece between full protection and subjecting yourself to personal liability. Click Here for More details about this package for a Single Member LLC.

The biggest reason that any business, solo owned or otherwise, should be run through a limited liability entity such as a limited liability company is for personal liability protection.

The costs to create and maintain a limited liability company is so low and the number of business related lawsuits are rising dramatically. Without an LLC, you are subjecting yourself and everything you own to risk of loss. Why do this?

You may start asking yourself- “well, who would ever sue me?” This is the famous question asked by the thousands of sole proprietors who have been sued and lose their home and personal assets every year. Lawsuits are about money. Once you have assets or your business starts to become successful, you become a higher risk target.

Instead of asking what the changes are of you ever getting sued (which is much higher than you think), analyze the costs to create and maintain an LLC for your business v. the potential loss if you do not.

Operationally, once you create an LLC, there is little difference in how you would run the business other than the fact that it will be the LLC who is the business entity. There are very little formalities and no legally required meetings or formal approvals.

From a tax perspective, there is no difference, a single member LLC is disregarded as a separate entity for federal income tax purposes only. You would file your business taxes
the same way as if you were a sole proprietor.

Protect Yourself.