Single Member LLCs

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We are often asked if a Texas LLC can be owned by a single member/owner. Single-member LLCs (SMLLCs) are allowed in Texas and SMLLCs are one of the most common small business structures. In this post we will do a deep dive into the single-member LLC.

What is a Single-Member LLC?

An owner of an LLC is called a "member". As such, a single-member LLC is an LLC that has a single owner.

How is a Single-Member LLC Taxed?

For federal tax purposes, the IRS considers a single-member LLC a “disregarded entity.” In other words, the IRS will tax the business just like it would tax a sole proprietorship. The profits (or losses) of the business are simply reported on the member’s tax return on Schedule C. If you do not like the default tax classification for your SMLLC (disregarded entity/sole proprietorship), you can tell the IRS you would rather your SMLLC be taxed as an S Corporation (by filing Form 2553) or a C Corporation (Form 8832).

Is a Multi-Member LLC Better than a Single-Member LLC?

No, a single-member LLC is just as protective (and protected*) as a multi-member LLC. Let’s take a step back. The most obvious benefit of an LLC is to protect the LLC’s members/owners from LLC obligations. An LLC, whether owned by one or more members, provides its owners protection from the business liabilities. In other words, the owners’ personal assets are not at risk if the business is sued.

*Unlike a corporation, an LLC (single-member or multi-member) is also protected from the personal liabilities of its owners. This is one of the many reasons why LLCs are more popular than corporations and is often under appreciated. See more advantages of an LLC here →.

If a member/owner of an LLC is personally sued (a car wreck for example or defaulting on a mortgage) and the plaintiff ultimately gets a judgment against the member, the plaintiff can seize the member’s non-exempt assets (i.e. real estate that is not the member’s homestead, boats, bank accounts, shares of a corporation, etc.) if the judgment is not paid. By law, the member’s ownership interest in their LLC CANNOT be seized! The only way to attack a member’s interest in their LLC is by way of a charging order. A charging order is a directive to the LLC to make distributions to the judgment holder rather than the member for as long as the judgment remains unpaid. With a well drafted company agreement, the members have the authority to decide whether or not to make distributions. Once a charging order is in effect, the LLC can stop making distributions.

The reason people ask if a multi-member LLC is better than an SMLLC is because some states actually allow the holder of a judgment against an individual that owns 100% of an LLC to bypass the charging order and seize the member’s LLC interest. For that reason, some websites or attorneys unfamiliar with Texas law will recommend giving a small percentage to a 2nd member. Adding a 2nd member to keep the charging order as the sole remedy is not required in Texas. Please note however, the laws of another state may apply if, for example, your LLC owns property or does business outside of Texas, or a member/owner lives outside of Texas.

Does a Single-Member LLC Need an EIN?

Yes, every LLC including a SMLLC will need a Federal Tax ID (also know as an EIN, which is short for Employer Identification Number) to open a bank account in the LLC's name.

The IRS, does not require a single-member LLC obtain an EIN unless the single-member LLC (1) elects to be treated as a corporation; (2) has employees; or (3) has an excise tax liability.  However, most banks will require an EIN for banking purposes even though the IRS does not.

Does a SMLLC Need an Operating Agreement?

While not required by law, a single-member LLC will want to have a governing document (aka operating agreement or company agreement). Having an operating agreement helps to protect your status as an LLC, particularly if you are a single-member LLC.  A SMLLC can look an awful lot like a sole proprietorship, but having an operating agreement in place helps to establish your business as a separate entity and maintain the limited liability firewall that protects the LLC's owner(s) from the LLC's liabilities. 

Additional Resources

Create a Single Member LLC

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