Reasons for a Single Member LLC in a Service Business
By Peter Jason Riley
In March of 2003 Governor Mitt Romney signed into law legislation that now allows the “Single Member” LLC in the state of Massachusetts (Massachusetts was exactly the 50th state to pass such legislation). A limited liability company ("LLC") offers the same asset protection as a corporation in Massachusetts and almost every other state. If you sign agreements in the name of the LLC, then the LLC is the responsible party on the agreement, not you as an individual owner. If the business is not successful, or if it incurs a large unexpected debt (which you did not personally guarantee or sign for), then your other personal assets (like home, auto, investments, etc.) are protected from the LLC creditors.
The cost of setting up a single member LLC is minimal. The filing fee charged by Massachusetts is $500. Legal fees to prepare the internal documents and make the necessary filing with the state are inexpensive. Continuing costs are an annual renewal fee to Massachusetts which currently costs $500. It is urged that at about the same time the owner have an annual meeting with the lawyer, which is sometimes done over the phone, to produce minutes for the LLC.
Operating as an LLC
In order to have the asset protection benefits of an LLC, especially a sole member LLC, the owner must observe the formalities and operate the business as an LLC. There should be adequate capitalization depending on the nature and extent of the business. The owner should have annual meetings and produce statements about the past business year and expectations for the future. The owner must be careful to enter into contracts through the LLC, and not personally. The owner should use checks and stationery to give notice to third parties that they are dealing with an LLC. These formalities are easy to observe after discussion with the lawyer and review of helpful documents which we will provide.
Ease of Operation
The single member LLC should be operated as a separate business. This is not at all difficult. The owner needs a separate business checking account, and set of books. The bookkeeping can be on QuickBooks or a similar software program. The same should be done even if operating as a sole proprietorship. The end of year tax work can be done by an accountant quickly and efficiently if you have a separate set of books for your business. The sole member LLC will not require a separate federal income tax filing. The income tax can be reported on schedule C of your personal tax return. For federal income tax purposes the single member/owner LLC is disregarded.
An LLC will not protect the owner against a claim based on the negligence or professional malpractice (if the owner is a licensed professional) of the owner. These types of claims are distinguished from contractual claims. The LLC will not protect the owner from LLC debts which the owner has personally guaranteed. Nor will it protect against claims against the owner who has fraudulently used the LLC for an inequitable purpose to the detriment of the claimant. Having given all these cautions, the courts in Massachusetts understand that one of the primary features of an LLC or a single owner corporation is to limit liability, and this is a legitimate function of the corporation or the LLC.
Running an LLC can be as routine as running a corporation or partnership or other business entity. However, setting up an LLC can be complex. If the LLC will hold real estate, there will be title transfer issues such as title insurance endorsements, liability insurance coordination and review of policies, a deed to be prepared to transfer title. If the LLC will operate a business you will have to consider such matters as coordination of business license, liability insurance, transfer of assets that will be used in the LLC, and employment identification number questions.