Single-member LLC Discussion

Two cases, In Re Ashley Albright and Littriello v. United States, et al. These cases were discussed to remind the reader that proper asset protection planning is a necessity and without it, the consequences may be disastrous.

I chose to include both cases to drive home my point that the courts are beginning to view a single-member LLC as a disregarded entity under multiple scenarios. Albright was a federal bankruptcy case where the entity was disregarded and Littriello was an employment tax liability case where the entity was again disregarded and the owner, Littriello, was found liable for the entity’s taxes.

From that newsletter, we received tremendous responses. So I wanted to take a moment and share with you some things that could have been done to improve the structures discussed in these cases that may have changed the outcome.

In Littriello, the taxpayer was found liable for the entity’s liabilities and was treated as a sole proprietor. What the taxpayer wanted to do was avoid the double taxation of a C-Corporation while trying to maintain the asset protection features that come along with owning a business as an LLC.

Had he worked with a CAPP™ advisor, for example, he would have been counseled on the “correct” way to set up his entity. He would have learned that a single-member LLC without the proper election to an S-Corporation results in the entity defaulting to the status of being a sole proprietorship. As a sole proprietor, the owner of the LLC has personal liability for all of the entity’s liabilities. In other words, had he or his CPA or attorney filled out form 2553 (“check the box”) to have the LLC treated like an S-corp., he could have avoided personal liability for the entity’s liabilities and some amount of employment taxes for any “distributions” he takes from the entity each year.

At the APS™ we believe, and the recent court cases seem to be of the same opinion that single-member ownership of an LLC offers little to no asset protection. We always suggest that if you are going to use an LLC for asset protection purposes then you must have an LLC that is set up in the correct jurisdiction (a state that has good charging order language in the statute) and it must be multi-member.

One more thing, many people replied to our recent newsletter wondering if a husband and wife would be considered multi-member. My response to them is that the courts, so far, have not defined what multi-member means and that many planning structures involve the husband and wife as “individual” owners; look at family limited partnerships which are excellent estate and asset protection planning tools.

The IRS also recently released a bulletin concerning the election of a husband and wife’s unincorporated business. Here we are discussing LLCs but I thought this was worth noting.

The IRS stated: “An unincorporated business jointly owned by a married couple is generally classified as a partnership for federal tax purposes.” The IRS went on to state that the married couple may not elect to be treated as a partnership and it gives reasons for not electing for such treatment.

However, what I believe is important and why I included this short piece in this newsletter is that the IRS bulletin also stated that “a business owned and operated by the spouses through a limited liability company does not qualify for the election.” By “the election” they mean the election to be treated as a partnership.

My reading of this IRS bulletin leads me to the conclusion that a husband and wife who are the sole members of an LLC should have their entity respected as a multi-member entity by the courts and the IRS. If you would like to read that bulletin, please click here.

The purpose of this newsletter is to, again, convey the importance of proper structure, setup, and implementation of your asset protection plan.  And, for those advisors who may be counseling their clients on single-member LLC ownership, I wanted you to be aware of these two separate scenarios where the courts have attacked single-member LLCs and remind you to be careful when giving advice to your clients on entity selection