Single-Member LLCs in Texas
Can or should an LLC be owned by a single member?
We are often asked if a Texas LLC can be owned by a single member. Single-Member LLCs (SMLLCs) are allowed in Texas and they are very common.
For 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 protected1) 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.
1Unlike a corporation, the LLC is also protected from its owners’ personal liabilities. This is one of the many reasons why LLCs are more popular than corporations and is often under appreciated.
If a member of an LLC is personally sued (think car wreck) 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, ownership interest in corporations, 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.