Advantages of the Single Member LLC in a Service Business
A limited liability company (“LLC”) offers the same asset protection as a corporation in Washington 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 (such as home, auto, investments, etc.) can be protected from the LLC creditors.
The cost of setting up a single member LLC is very reasonable compared to multiple member LLCs or corporations.
Operating as an LLC.
In order to have the asset protection benefits of an LLC, the owner of a sole-member LLC must take special care to 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 must be careful to enter into contracts through the LLC, and not personally. The owner should use LLC 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 a lawyer and a review of helpful documents.
Ease of Operation.
The single member LLC should be operated as a separate business. This is not 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 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 an owner who has fraudulently used the LLC for an inequitable purpose and to the detriment of the claimant.
Although running an LLC can be fairly routine, 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, and preparation of a deed to transfer title. If the property has a mortgage on it, the lender may impose conditions on changing title. If the LLC will operate a business you will have to consider coordination of business license, liability insurance, transfer of assets that will be used in the LLC, and employment identification number.
This information is general in nature and should not be relied upon for your specific circumstances. For information, questions, or comments, please contact Douglas J. Engel or Kathryn S. Kumar.