By definition, the owners of an LLC are known as members. As such, a Single Member LLC simply refers to an LLC that has a single owner or member. SMLLCs tend to have a poor reputation, as judges in several states take a poor view of them. Judges have a higher chance of ruling negatively against SMLLCs. Judges commonly declare that the person and company are the same. This gives the owner personal liability for company debts. Find out more about forming a Colorado LLC, registered a Colorado business and our registered agent services.
The most common group to use a Single Member LLC is a small business owner or a holding company. A small business owner could get around the issues of an SMLLC by selling or gifting 5 percent of the company. This is the threshold viewed as large enough to provide the benefits of an LLC with more than one member.
Each subsidiary within holding companies will also be Single Member LLCs. In this case, each member is the holding company itself. This has led to the adoption of sibling holding structures instead of a parent-child structure. Either model can work in Colorado, however. The fact that holding companies with subsidiaries are considered SMLLCs means that many e-commerce retailers and real estate investors are SMLLCs.
Despite having a bad reputation, SMLLCs are one of the most popular formations. That is due to the fact that not everyone has someone they trust as a partner. Many other sole business owners are happy to work alone. Additionally, SMLLCs form by default during the creation of subsidiaries and a holding company. That fact increases the number of SMLLCs.
The operating agreement for an LLC is the contract between the members. You do still need one even when there is just one member. The most important reason is estate planning. This prevents the company from being probated in a situation where you pass away and do not have a plan. Probation will eliminate cash flow, killing most businesses. To avoid problems, our firm’s operating agreements include provisions for transfer upon death. This way, you can choose a beneficiary, so the company has no trust requirement. That, in turn, lets it pass probate.
In addition, many banks require operating agreements, even for Single Member LLCs. These operating agreements are also helpful as a way to demonstrate ownership. They can additionally help in situations with a manager. An example would be if you buy real estate then hire a manager for property operations and open a bank account. In this situation, the operating agreement will outline actions the manager is allowed to take.
With the IRS, the default status is called a disregarded entity. That is a pass-through taxation type that prevents the double taxation you would deal with as a corporation.
Single Member LLCs can change their classification to c-corp, s-corp, or partnership taxation. Because of this type of tax flexibility, it is simpler to worth with a limited liability company than a corporation. You should work with your accountant to determine if one of the various classifications is better for you. The related information does not get sent to the Colorado Secretary of State. You must notify the IRS of classification changes within 75 days of receiving the EIN. This is done on form 2553.
SMLLCs have an unfortunate reputation due to how many states treat them. Luckily, Colorado stands out from the crowd and is more welcoming of small businesses. Even so, you must observe all corporate formalities. You cannot ignore best practices just because you are the only member of an LLC. You can reduce the burden with a close limited liability company. Even then, you will need to remain compliant. Learn more about forming a Colorado LLC and its advantages.