Single Member LLC
- What is it?
- Does it protect your personal assets?
LLC's are limited liability companies which have been created by the various state legislatures. Illinois adopted the Illinois Limited Liability Act in 1997 in order to create a form of business ownership that protects investors (members) from personal liability and always the business to be taxes as a partnership - what is commonly referred to as pass-though income.
A single member LLC merely means that only one person owns the LLC than having several owners (members) and multiple investors. A single member LLC is similar to a single shareholder corporation (which is frequently referred to as a held corporation).
The protection from creditors or liability it really the biggest advantage to organizing your business as an LLC. It protects you from lawsuits in case you get sued or from creditors. When you form an LLC (as well as with a corporation) you get the protection of a legal doctrine known as the “corporate veil.” This legal concept means that as long as you operate your business under the applicable LLC laws of the state you do business in, your exposure to potential liabilities is limited to the amounts you have invested in your business or the assets of the business. The Corporate Veil protects your personal assets (your home or other assets) from being seized by creditors. The protection from creditors is not absolute and in certain circumstances creditors can try to “Pierce the Corporate Veil” which is not easily done. See: "Developments in piercing the corporate veil", by George Bellas, Illinois State Bar Association, Trial Briefs, vol. 59, no. 12, June, 2014. The key point in protecting you and your family (and your personal assets) from the claims of creditors is to strictly operate like a big business and follow the rules. Don’t operate like it’s your own business, but rather do all of the things a big business does. For example, never sign your name in personal capacity – always sign as the “manager” or “president” or other office, set up a separate bank account for your business and set up a separate set of accounting ledgers which include all of the assets, liabilities and transactions of your business. A good place to learn how to operate a business using business ledges and accounting systems is the book Profit First. We also recommend that every small business learn how to use QuickBooks.
One key component to adhere to the formalities of an LLC is to have a valid operating agreement, even if you are the only member. The operating agreement is not public, but in the event you are sued, it demonstrates that you have been adhering to the formalities of the LLC laws and protects you from having the corporate veil pierced. The Operating Agreement describes how you get paid, how the business operates and what happens if something happens to you. There is a practical side to having a valid operating agreement. In case you end up in court, the terms of the operating agreement govern how the courts can interpret your actions and dictate what should be done in certain circumstances. Without an operating agreement, the court is free to make their decisions regarding the business. What makes this worse for members of an LLC, the LLC laws are not very specific as to what should happen upon a member’s death or breakup leaving the court to decide what should be done.
But an Operating Agreement is not worth a plugged nickel if the formalities of the Operating Agreement are not followed. That means you must follow the terms of the Operating Agreement, document your actions and have minutes of meetings (even if it is a meeting of one) to show that you are adhering to the rules governing the operation of an LLC.
With this form of ownership – a single member LLC – it makes no sense for anyone in business not to form an LLC in order to take advantages of the protections and tax treatment. The law firm of Bellas & Wachowski has the knowledge and experience to help you get started your business off on the right foot. Call George Bellas (847-823-9032) for a consultation and make your dreams a reality.