Single Member Limited Libility Companies – A Definitively Answer?

Today we will explore the answers from the following free sources:

Before I share the answers, let me share one note – the answers don’t include one from a particular SBDC director, who classified my request for their attorney volunteer to answer my question, as a “request for legal advice.” For the record, their answer was only 1 – 2 sentences long. Nor will I share the identities of the respondents.

Here are my questions:

  • In the state of Illinois, does a single member LLC offer legal protection (or only for an LLC with more than one member)?
  • If one sells goods on the Internet throughout the 50 states, can an LLC registered in Illinois allow that – or do I need to register an LLC in all 50 states?

SBDC Answer:

An LLC is a separate entity to it affords protection to all members whether that is one person or many. Understand however, that an LLC ( or corp or whatever) does not limit liabilities due to personal negligence or actions (e.g., if you personally screw up and get sued, the LLC won’t protect you as you cannot avoid responsibility for your own personal actions.

The LLC would be organized in a state of your choice, and in most cases, this would most likely be your state of domicile or where the business is located. You likely won’t need to register as a foreign entity in other states, however you might be subjected to state or local taxes (you’ll definitely be exposed to these in IL), and certainly any prohibitions or restrictions other states might have on the product(s) you are selling (like alcohol, tobacco, gaming, etc.)

Score Answer 1:

Ordinarily, a LLC provides protection for personal assets regardless of the number of members. You do not need to register in any state in which you do not have a physical presence, eg. warehouse, sales person living there, office, etc. But just to satisfy yourself, I am attaching a spreadsheet with web addresses for the state of Illinois. Please use it to research the answers to your questions.

Score Answer 2:

I have not read the Illinois limited liability statute but imagine it is very comparable to the limited liability statute used in most states. It does not matter whether the llc has one member or several. The “insulation” of private assets from business liabilities applies. There are a couple of exceptions to this.

  1. First, if the business is a personal service business, such as a medical practice, accounting or law office, the state statute generally holds the member who provides such personal service legally accountable for certain kinds of professional liability (i.e., malpractice).
  2. Second, most lenders will require the member(s) of an llc to which a loan has been made to personally guarantee the loan, thereby exposing their personal assets to the liability of the business for the loan.

A business can be registered in one state and conduct business in other states without having to incorporate, or create a limited liability company in each of the other states. Your promotional material should disclose in the company name that it is a limited liability company so the customer understands the nature of the entity with which it is dealing. Thus, for example, listing the business as “Acme, LLC” would communicate that the company is a limited liability company.

Your more pressing concern when you begin to sell in other states is whether you will collect and remit sales taxes to those other states. You will find that large multi-state operators – such as LL Bean – which do a great deal of on-line selling collect taxes for sales to customers in those states in which there are such taxes. Smaller vendors, however, often do not collect and remit such taxes. For all such vendors it is important to be alert to the fact that the states know they are “missing” a lot of potential tax revenue and, sooner or later, are going to try to collect it. So, it is a business “risk” you will have to consider and make a decision about.

I hope this is helpful. Let me know if you need any clarification of what has been said above. Thanks for contacting SCORE.

Score Answer 3:

A single member LLC can offer the same legal protection as a multiple member LLC. However, you should be aware of the situation where the legal action is brought against you (as opposed to the LLC). In other words, if a legal action is brought because of the actions of an employee, you as the owner are protected. If the action is brought against you as owner/employee because of actions you personally took, the result may be different. The laws on this can vary, and for further clarification, you will need to contact an Illinois attorney.

As to your second question, assuming you have only one place of business (in Illinois), you will be engaged in interstate commerce with respect to all other states and need not register or collect sales tax from customers in states other than Illinois.

A Parting Note:

I have finished the book Limited Liability Companies for Dummies by Jennifer Reuting. She has a website at http://www.myllc.com/. For the record, she doesn’t endorse a single-member LLC. Instead, she would tell them:

  • Give some shares to a friend and make them the second member
  • Set up a corporation and make it the second LLC member

 

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3 Responses

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  2. I like the LLC model because it is the least expensive to file for, but then you can still apply for s-corp federal tax status. Best of both worlds.

  3. […] Single Member Limited Libility Companies – A Definitively Answer? « B2B-TechCopy Technol… […]

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