Understanding Single Member LLCs

A Single-Member Limited Liability Company (“SMLLC”) is a business structure designed for solo entrepreneurs, offering both liability protection and operational flexibility. LLCs were originally created for multiple owners, with Wyoming becoming the first state to recognize this entity type in 1977. Over the years, other states followed suit, and by 1996, all 50 states and Washington, D.C., had passed legislation allowing LLC formation, including single-member structures.

It’s important to note that SMLLCs can be structured as member-managed, where the owner/member handles daily operations, or manager-managed, where a designated manager (who may or may not be a member) takes on operational responsibilities, providing additional flexibility for business owners.

Key Benefits of a Single Member LLC

• Liability Protection: The LLC structure helps shield personal assets from business liabilities. If the LLC is sued, the owner’s personal assets remain separate—assuming proper business practices are followed.
• Tax Simplicity:The IRS treats an SMLLC as a disregarded entity by default, meaning profits and losses pass directly to the owner’s personal tax return. Alternatively, an SMLLC can elect S Corporation taxation, which may offer additional tax advantages if the requirements are met, and result in a second tax filing.
• Easy Formation & Maintenance: Unlike corporations, SMLLCs require fewer formalities. There’s no need for shareholder meetings, bylaws, or extensive compliance measures.
• Flexible Profit Distributions: The owner has discretion over how profits are allocated, making it easier to reinvest in the business or take distributions as needed.

Legal Considerations

Charging Orders & Creditor Rights

In Florida, a charging order allows creditors to claim a debtor’s distribution rights in an LLC without granting management control. This legal tool is the exclusive remedy for creditors to satisfy judgments against LLC members, as outlined in Florida Statute § 605.0503. However, for single-member LLCs, the Florida Supreme Court’s decision in Olmstead v. FTC allows creditors to pursue additional remedies, such as foreclosing on the member’s entire interest, due to the absence of other members whose interests need protection.

For creditors, this means that while a charging order can secure distributions, it may not suffice for single-member LLCs, prompting consideration of foreclosure. LLC members should be aware of the limited protection charging orders offer and may need to explore additional asset protection strategies. Understanding these dynamics is crucial for both creditors and LLC members to navigate the legal and practical implications effectively.

Piercing the Corporate Veil

While an LLC typically protects personal assets, courts can disregard this protection if the LLC is improperly used. If a judge determines that the LLC is merely an extension of the owner—such as when personal and business finances are mixed—the owner could be held personally liable for business debts.

Managing & Operating an SMLLC

Management Structure

SMLLCs must decide whether to be member-managed or manager-managed, as mentioned above. Members can still be managers, but the fact that they are members doesn’t have to be made public.

Choosing between a member-managed or manager-managed structure is also crucial for defining apparent authority within the business.  If member-managed, only members have apparent authority to bind the business. If manager-managed, only managers have apparent authority to bind the business.

Opting for a manager-managed structure can help establish a more precise separation between ownership and day-to-day management, which may strengthen liability protection. It also allows for owners to eventually work “on” their business and not “in” their business without restructuring the management structure of the company.

Additionally, a manager-managed SMLLC allows for the use of management titles, offering greater privacy since members are not required to be listed in official entity documents. This can be especially beneficial when an SMLLC is owned by a trust, helping to keep ownership details confidential.

Dissolution Process

If an owner decides to close an SMLLC, the process is relatively straightforward:

1. 1. Obtain consent from the sole member (yourself).
   2. File the necessary dissolution paperwork with the state of formation.
   3. Settle outstanding debts.
   4. Distribute remaining assets.

Common Mistakes to Avoid

• Skipping an Operating Agreement: Even though an SMLLC has only one owner, a formal operating agreement defines the business structure and helps prove the LLC is a separate entity.
• Mixing Personal & Business Finances: Keeping separate bank accounts and records is crucial to maintaining liability protection.
• Overlooking Legal Risks: Without proper documentation and financial separation, an SMLLC owner could unintentionally expose themselves to personal liability.

Final Thoughts

Single Member LLCs provide a nice balance of simplicity and legal protection, but come with their own challenges. Understanding your state’s laws, keeping finances separate, and maintaining proper documentation can help a business maximize the benefits while minimizing risks. Having the right business partner to help you navigate the fundamentals can be the difference between smooth sailing and a shipwreck on your entrepreneurial journey.

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Don’t have a business attorney? Get in touch with our team by emailing Info@harbourbusinesslaw.com.

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This Blog was written by Founding Attorney, Katelyn Dougherty.

DISCLAIMER: This blog is for educational purposes only and does not offer nor substitute legal advice. This blog does not establish an attorney-client relationship and is not for advertising or solicitation purposes. Any of the content contained herein shall not be used to make any decision without first consulting an attorney. The hiring of an attorney is an important decision not to be based on advertisements or blogs. Harbour Business Law expressly disclaims any and all liability in regard to any actions, or lack thereof, based on any contents of this blog.