IRS Treatment of the One-Member LLC.
An LLC with only one member / owner is automatically considered to be a sole proprietorship unless an election is made to be treated as a corporation.
Thus, the sole member of an LLC will file (Form 1040), (U.S. Individual Income Tax Return). and will include (Form 1040, SCHEDULE C) (Profit or Loss from Business) with his/her tax returns.
Regardless of how many members the LLC has, the LLC may file an Election to be Treated as a Corporation for Purposes of Taxation IRS Form 8832. If an election is made to be treated as a corporation, the LLC must file Form 1120 (U.S. Corporation Income Tax Return). IRS Form 1120, Form 1120 Instructions.
IRS Treatment of the Two-Member LLC
If your LLC has two or more owners, it will automatically be considered to be a partnership unless an election is made to be treated as a corporation as described above. A partnership files Form 1065 (U.S. Partnership Return of Income).
Where an election is made to be treated as a corporation, Form 1120 (U.S. Corporation Income Tax Return) is filed.
Minimum Members Required by State Law
Traditionally, most states have required that an LLC consist of two or more members (owners). Recently, however, the majority of states are allowing single-member LLCs.
Separate Legal Entity Status
Similar to the corporation, an LLC is recognized as a separate legal entity from its “members.” Thus, an LLC can own property, commit itself to contractual obligations, and even commit crimes.
Limited Liability for Members (owners)
In most cases, only the LLC is responsible for the company’s debts thus shielding its members from personal liability. However, there are some exceptions where individual members may be held liable:
Guarantor Liability
Where an LLC member has personally guaranteed the obligations of the LLC, he or she will be liable. For example, where an LLC is relatively new and has no credit history, a prospective landlord about to lease office space to the LLC will most likely require a personal guarantee from the LLC members before executing such a lease.
Alter Ego Liability
Where an LLC member has personally guaranteed the obligations of the LLC, he or she will be liable. For example, where an LLC is relatively new and has no credit history, a prospective landlord about to lease office space to the LLC will most likely require a personal guarantee from the LLC members before executing such a lease.
Fewer Formalities than the Corporation
Although a corporation’s failure to hold shareholder or director meetings may subject the corporation to alter ego liability, this is not the case for LLCs in most states. An LLC’s failure to hold meetings of members or managers is not usually considered grounds for imposing the alter ego doctrine where the LLC’s Articles of Organization or Operating Agreement do not expressly require such meetings.
Shared Management and Control
Management and control of an LLC is vested with its members unless the articles of organization provide otherwise.
Voting Interest According to Ownership
Ordinarily, voting interest directly corresponds to interest in profits which directly corresponds to share of ownership unless the articles of organization or operating agreement provide otherwise.
Transfer Requires Majority Consent
No one can become a member of an LLC (either by transfer of an existing membership or the issuance of a new one) without the consent of members having a majority in interest (excluding the person acquiring the membership interest) unless the articles of organization provide otherwise.
Perpetual Duration
Traditionally, most states did not allow an LLC to have a perpetual existence; LLC’s were traditionally required to specify the date on which the LLC’s existence would terminate. Today, however, most states allow a perpetual duration for an LLC if stated in its articles of organization.
Dissolution Upon Certain Events
Unless otherwise provided in the articles of organization or a written operating agreement, an LLC is dissolved at the death, withdrawal, resignation, expulsion, or bankruptcy of a member (unless within 90 days a majority in both the profits and capital interests vote to continue the LLC).
Operating Agreement Required
To validly complete the formation of the LLC, members must enter into an Operating Agreement. This Operating Agreement may come into existence either before or after the filing of the Articles of Organization and depending on your particular state’s laws, may be either oral or in writing.
Different Laws in Different States
While laws governing corporations have grown to be quite uniform amongst the different states over time, LLC statutes can vary quite drastically from state to state. This is most likely due to the fact that the LLC is a VERY new form of business structure only recently recognized by most governments (e.g. Hawaii only recently began recognizing the LLC as a legitimate form of business in 1997.
Good luck in all your business endeavors!
By: Philip K. Akalp, Esq.
NOTE: The information contained herein is intended to serve as a general publication providing general information to the public. The information herein should NOT be considered as a substitute for legal advice. MyCorporation.com strongly urges you to contact an attorney before making any decisions that concern financial or legal matters.
Philip K. Akalp, Esq. is the Chief Executive Officer and Co-founder of MyCorporation.com, the Internets Leading Incorporation, LLC Formation, and Trademark Service Provider. Since its launch in 1998, Mr. Akalp has had the privilege of forming over 70,000 corporations and LLCs for small business owners across the nation. Click here for more information on forming LLCs and corporations.
