Limited Liability Companies (LLCs) are businesses that combine elements of corporations and pass-through businesses (i.e. partnerships or small proprietorships).
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As the name suggests, business LLCs are popular with business owners because they are flexible and have the potential to limit their personal liability.
LLCs are the creations of state legislatures and not the federal government. As states began to recognize LLCs, they created statutes requiring that LLCs have two or more members. There was no provision for a single person to create and own a limited liability company.
Gradually, that changed and now all 50 states (as well as the District of Columbia) recognize LLCs owned by just one person. Called Single Member LLCs, this business designation filled the gap for single owner companies looking for non-incorporated liability protection.
However, Single Member LLCs don't share all the characteristics of multi-member LLCs or LLC partnerships. Single member LLCs are subject to special treatment in a handful of areas that can substantially impact their owners:
The IRS officially recognizes three types of businesses: Corporations, partnerships, and sole proprietorships. LLCs fall under the legislative purvey of state governments and the IRS doesn't recognize them as a separate business category even though they do make provisions for LLCs to be recognized as either partnerships or corporations. But from the perspective of the IRS, Single Member LLCs are persona non grata – "disregarded" entities that lack any standing for tax purposes. By default, Single Member LLCs are treated as sole proprietorships in which income and expenses flow through to the owner's personal return.
Single member LLCs fare better when it comes to the issue of liability protection. From a legal standpoint, a single member LLC enjoys almost the same liability protection as a multi-member LLC. As long as the company's assets and operations are clearly separated from personal accounts, owners enjoy a level of protection from personal liability. The place where it gets sticky is in a reverse liability scenario or an LLC charging order. LLC charging order protection prevents creditors from seizing multi-member LLC business assets for personal liabilities. The idea is that an LLC member shouldn't have to suffer for the personal misfortunes of other members. However, Single Member LLCs enjoy no such protection – if you default on a personal loan, your creditor is legally entitled to seize LLC assets to satisfy the debt.