The LLC or limited liability company is a business organization that dates back to the late 1800s, but gained popularity in the United States after Wyoming created the first statute in 1977. It was based on an 1892 German law and went beyond "partnership associations" several states had enacted in the late 1800s. The LLC form spread rapidly among small businesses after the Internal Revenue Service issued rules about taxation, although the IRS still does not recognize the LLC as a taxable entity.
All States Allow
Most states that adopted LLC laws allowed those businesses to have one or more owners, called members. The last holdout to a single-member LLC was Massachusetts, which adopted its law on March 5, 2003. Prior to that time, the state required LLCs to have at least two members, a requirement that often was evaded by an owner naming a spouse as a second member.
Most Popular Form
Now that all states and the District of Columbia allow single-member LLCs, it is the most popular of all LLCs. It can consist of one individual, operating as a sole proprietor with or without employees, or can be a corporation forming a single-member LLC to gain some specific protection of assets. There still are variations in state laws, although most conform to a uniform standard.
Protection Challenges
All LLCs shield personal assets of members against liabilities from actions of the LLC, but this protection for single-member LLCs has been challenged in some court cases. A Colorado court, for instance, held that a single-member LLC did not protect assets when the member filed bankruptcy. Other decisions have allowed courts to dissolve single-member LLCs or foreclose on a single member's assets. Nevada and Wyoming have changed LLC laws to allow creditors to get only the single-member's assets in the LLC and not personal assets.
Tax Issues
LLC profits "flow through" to the owner without taxes. The IRS taxes single-member LLCs as "disregarded entities" or essentially sole proprietorships unless the member elects otherwise. A single-member LLC can choose to be taxed as a corporation, either an S class where profits continue to flow to the member or a C type where a corporation files corporate taxes. An individual owning a single-member LLC files only personal income taxes, but if it has employees must also file federal Social Security, Medicare and unemployment taxes for those employees.