Single Member LLC = Dangerous?

[KingHippo]

I've been reading that single member LLCs are dangerous to have because they are more or less treated like a sole proprietorship. A book I read suggested that if you are in this scenario to get a silent partner / gift a small percentage (1% or so) of the business to them.

If I were to do this, would this partner truly be "silent"? I mean, wouldn't the person have to file taxes? How would I pay this person the 1% of the profits and when would they get these profits exactly?

[vangogh]

I've never seen where LLCs were considered dangerous. I'm still a sole proprietor and can't say I'm all that familiar with the LLC. My understand is they offer a layer of protection, though not quite as much protection as other forms of incorporating. I think the main issue is to make sure it's very clear when you're acting as you the individual and when you're acting as you the officer of the company.

That might be where the dangerous thing comes in because it can be easy to forget to use the right checkbook or credit card at times.

As far as I know LLCs aren't dangerous and do offer more protection than a sole propreitorship.

[Steve B]

I think VG is right. There is nothing wrong with an LLC with only one person, it's probably just more likely that someone in that scenario will not be following the proper practices to protect themselves. That reminds me - I have to update my signature to reflect the name of my LLC - not just my DBA.

[Business Attorney]

I've seen some writers say that single member LLCs might be ignored for liability purposes, but I don't think that is likely and I haven't seen any case where it has happened. I see no reason why a limited liability company with only one member would be any less acceptable than a corporation with a single shareholder, and those have been upheld for years.

I do think that there are two issues that people may be confusing that may make single member LLCs in some cases less of a benefit than they might have thought.

First, a single member LLC may be more prone, by the nature of the business itself (not the fact that it is an LLC), to expose the owner to liability, not as a member of the SMLLC, but for other reasons. For more on this, you can read a whole article I wrote "How Limited is Limited Liability?"

Second, one of the features of the LLC is not only that it protects a member from the liabilities of the business, but also that it protects the business from a creditor of a member. Normally, a creditor of the member has no ability to directly attack the assets of the business. The creditor is limited to obtaining a charging order and can only get whatever distributions the member would get. In a SMLLC, at least one court has held that with only one member, the creditor in bankruptcy essentially steps into the shoes of the member and CAN exercise rights against the LLC's assets. To plug another of my articles, you can read my complete analysis at "Single Member LLC or Multiple Member LLC?"

[Evan]

It is not dangerous at all. SMLLCs are very common. There are some issues that MAY come up as mentioned, but those aren't common.

There is no such thing as a "silent partner". That 1% partner would own 1% of the LLC but could equally bind the LLC into doing something without the other. If they were to enter into a contract, the other party isn't going to say "And what % of the LLC do you own?"

MMLLCs also require you to file 1065, versus the 1040 Schedule C of the SMLLC. That form is much more complex, and will certainly cost more to be prepared by a professional than a SMLLC.