| The limited liability company is touted for its tax | | | | paperwork. While technically true, the lack of |
| flexibility and asset protection benefits. While valid, | | | | paperwork is a dangerous problem when the LLC is |
| single member limited liability companies are ripe for | | | | attacked. A valid, running business produces |
| alter ego claims, which means the owner losses the | | | | paperwork. A sham company does not. There are |
| asset protection benefit and becomes personally liable | | | | two particular areas where this is a problem. |
| for the debts of the company. | | | | The first document is the Operating Agreement. Many |
| Let's start with the basics. What is a single member | | | | people set up single member LLCs through cheap |
| LLC? Well, the person that has an ownership interest | | | | online services. They get a nice fake leather book, the |
| in an LLC is called a member. This is the equivalent of | | | | articles of organization stamped by the secretary of |
| a shareholder in a corporation. As the name implies, a | | | | state and then a bunch of forms. They don't fill out the |
| single member LLC is a company that has only one | | | | forms and, in many cases, the forms are not applicable |
| owner. It is legally viable and protects that owner from | | | | to their single member entity. When the corporate |
| the debts of the company, but many owners are | | | | book has to be produced during a lawsuit, it is a |
| waiving this protection because of something known | | | | disaster. Instead of helping prove the legitimacy of the |
| as alter ego. | | | | LLC, it helps the plaintiff prove the company is a sham! |
| The asset protection provided by an LLC is based on | | | | The second problem area is the lack of minutes. |
| a legal fiction. Under the law, the LLC is treated as a | | | | Technically, an LLC is not required to have minutes. |
| physical purpose independent of the member owner. | | | | Let's be clear, however. It should. Keeping minutes |
| As long as this separation is maintained, the debts and | | | | regarding significant business events is evidence of a |
| obligations of the LLC do not pass through to the | | | | legitimate, functioning business. A company that has no |
| member owner. Many single member LLCs, however, | | | | such minutes is evidence of a business entity that |
| don't maintain this separation. Instead, the companies | | | | might be a scam. |
| appear to be shams. When a judge makes such a | | | | If you are the member owner of or considering |
| determination, the protections of the company are set | | | | forming a single member LLC, it is critical that you treat |
| aside and the member owner is exposed. | | | | it as a legitimate business. Get a valid Operating |
| The number one problem most LLCs have is the | | | | Agreement created and minutes so that you don't run |
| paperwork. You have probably read that LLCs are | | | | into a situation where the entity is set aside and your |
| great for small businesses because they require little | | | | personal assets [home, stock, savings] are exposed. |