Single-member LLCs under attack, again

When the Asset Protection Society (APS™) and its members discuss setting up LLCs for asset protection purposes or the use of LLCs in various planning structures, we always stress that the LLC be multi-member and set up in the correct jurisdiction.

To read more about why clients should consider using LLCs for asset protection, please click here.

A while ago we discussed In Re Ashley Albright, a Colorado case where a debtor in bankruptcy was the sole owner of a Colorado LLC.  Albright argued that under Colorado’s LLC statute the property in the LLC should be protected from sale by the trustee and, at most, the trustee should be able to obtain a charging order.

The court disagreed and allowed the trustee to sell the property an LLC.  The decision was based on the fact that there were no “other” members in the LLC.  The Colorado statute is written to protect “other” members and requires unanimous approval of the “other members” when a transfer of ownership is imminent.  The statute protects all interested parties and prevents them from having to work with a party of whom they do not approve, i.e., a creditor.  Because Albright’s LLC was single-member, there were no “other members” to protect and ownership could be transferred to the bankruptcy trustee.

Now the 6th Circuit of Appeals has again attacked single-member LLC ownership, this time the court discussed taxation of the entity.

In Littriello v. United States, et al., the court held that owners of single-member LLCs must “check the box” to be treated as a corporation for tax purposes.

If the owner of a single-member entity does not “check the box” they will be taxed at the default status which is that of a sole proprietorship.  And, along with that comes sole proprietorship liability.

This “check the box” regulation became effective January 1, 1997, when the IRS “proposed to allow an election by the taxpayer to be treated as a corporation or, in the absence of such an election, to be ‘disregarded,’ i.e., deemed a partnership (for entities with multiple members) or a sole proprietorship (for those with a single member).”

Littriello was the owner of several single-member LLCs and the court held that he had not elected to have the entities treated as Corporations so the entities were treated as sole proprietorships and he was responsible for the LLC’s liabilities.

Under current Treasury regulations you simply “check the box” to elect Corporate tax status.  Electing to be taxed as a Corporation means that the taxes flow through the Corporation onto the owners; thus, double taxation., once at the corporate level and again at the individual shareholder level.

He did not “check the box” because he wanted to avoid the double-tax consequences of Corporate status.  Doing so does avoid double taxation because it keeps the owner at the default status of sole proprietorship where the owner is taxed one time in his tax bracket.  [There is no way he could have even been treated as a partnership (the absolute worst way to own a business) because he was a single-member entity.]  Because he defaulted to ownership as a sole proprietor to avoid the double taxation of the Corporation he also missed out on the protections that come along with a properly setup entity from an asset protection standpoint.

I am not sure if this advice came from his advisor or if he thought of it on his own but it is clearly not good advice.  When making decisions like this, no matter what the reason, you should consult an advisor (preferably a CWPP™ advisor who is also a member of the Asset Protection Society) with the knowledge to counsel you on all alternatives and their ramifications.

A quality advisor would’ve been able to discuss the consequences of owning the LLCs as a sole proprietor.  Again, not only was he taxed as a sole proprietor he was also personally liable for all actions of the LLC.

Littriello chose to be taxed at the default status because he thought he was benefiting himself and saving on taxes.

Had me met with an advisor who was able to counsel him on the consequences of his choices he would’ve made the decision to “check the box” and he would not have been found personally liable for the LLC’s actions.  (Note: the court does discuss the employment tax issues of the case.)  This advisor would’ve also been able to discuss how his actions would fit into his asset protection plan if he had one.


What does this case tell us as advisors?

Littriello v. United State, et al., and In Re Ashley Albright tell us of the importance of education and proper planning.  For advisors this means an opportunity to review your clients’ and prospective clients’ planning.  Here at the APS™, we emphasize the importance of owning and setting up your or your client’s LLCs in the proper jurisdiction with multiple members.  This is “proper planning” based on these recent court rulings.

Think about the advice you give your clients; are you educated on the proper ownership, planning, and use of LLCs and other structures?  If not for your clients then, please, for yourself, become educated on these and other structures by joining the Asset Protection Society and/or becoming a Certified Asset Protection Planner (CAPP™).