An LLC, or limited-liability company, is a legal entity for a business that provides much of the same liability protection for its owners as a corporation would without actually being a corporation. The specific statutes for single- and multi-member LLCs vary from state to state. However, an understanding of general trends can help you to decide whether you and your spouse should both be listed as members of the LLC.
In some cases, only one spouse may have any actual involvement in the running of the LLC, while the other may intend to remain completely uninvolved. In these cases, it may seem natural to adopt the single-member LLC model. However, if a husband and wife agree that they prefer to get any added protection that a multi-member LLC can offer, they may find it worthwhile to adopt a multi-member LLC model. In this case, the second member should be able to show at least some level of involvement in the company's operations and decisions. Otherwise, according to Keyt Law, a court may later define her as a "sham member" and rule that the LLC is a single-member LLC.
Bankruptcy Protection for Members
While single-member and multi-member LLCs tend to provide the same level of protection of personal assets from company liabilities, the same cannot be said for protecting the company from personal liabilities. For instance, in a Chapter 7 bankruptcy case, the court has the power to seize many types of assets belonging to the person who has declared bankruptcy.
If an LLC is a multi-member LLC, this seizure of assets usually cannot extend to company assets without the consent of the LLC other members, as it would essentially result in the court taking one person's assets due to another person's bankruptcy. However, in a single-member LLC, the court may view company assets as being synonymous with owner assets, seizing anything valuable owned by the company to sell it off and pay the owner's debts.
Read More: LLC Bankruptcy Laws
The Risk of Divorce
When married couples file for divorce, they often go to court regarding the partition of assets. An LLC can be a very valuable asset. If one spouse owns a single-member LLC, the other spouse might be entitled to all or a portion of that LLC's assets. This decision is something that occurs on a case-by-case basis after a fair amount of litigation.
However, in the case of a multi-member LLC, the operating agreement should specifically stipulate the amount of the company that each member owns. In this case, the court may simply rule that each spouse remains with the share of the business apportioned in the operating agreement.
Differences in Taxation
In the United States, corporate income is often double-taxed in that both the company and the shareholders must pay income tax. LLCs, on the other hand, only have their income taxed on the owner's level. For this reason, on the company level, no difference exists between single- and multi-member LLCs when it comes to income taxation.
However, on the personal level, a married couple may see a difference when it comes to taxation of personal income. If a married couple files separate tax returns and only one spouse owns the LLC, the profits from the LLC may put that individual into a higher tax bracket, resulting in a higher tax rate. If a married couple files a joint tax return under a single-member LLC or if both spouses are members of the LLC, this may not happen.
Ronald Kimmons has been a professional writer and translator since 2006, with writings appearing in publications such as "Chinese Literature Today." He studied at Brigham Young University as an undergraduate, getting a Bachelor of Arts in English and a Bachelor of Arts in Chinese.