Single Member LLCs

Should a Single Member LLC Have an Operating Agreement?

Question: I am the sole member of my Arizona limited liability company. Should I sign an Operating Agreement for my LLC?

Answer: Although Arizona LLC does not require that the members of an Arizona LLC sign an Operating Agreement, as an Arizona LLC attorney I highly recommend that all members of an Arizona LLC, including single member LLCs, sign a “good” Operating Agreement. A good Operating Agreement is a document that is drafted specifically to comply with Arizona’s LLC law and that contains provisions and language needed by most LLCs and their members. The fact the members of an LLC sign an Operating Agreement could actually be detrimental to the members if the Operating Agreement is poorly written or not written specifically to comply with Arizona LLC law.

There are several reasons why the sole member of an LLC should sign an Operating Agreement:

  • Some banks require an Operating Agreement signed by the sole member before opening a bank account in the LLC’s name.
  • If the LLC will ever buy or sell real property the title insurance / escrow company will require an Operating Agreement signed by the sole member.
  • If the LLC were to borrow money the lender will require an Operating Agreement signed by the sole member
  • When courts are asked to pierce the company veil and hold the sole member liable for the debts of the LLC one of the factors that counts against the member is the lack of an Operating Agreement. If you don’t have a signed Operating Agreement it tells the judge and jury that you are treating your LLC like a hobby rather than a business. Businesses have signed Operating Agreements signed by their owners.
  • To set the rules that govern the operation of the company if the sole owner were to die and his or her interest is inherited by one or more loved ones.

A good Operating Agreement is a complex document that should cover a lot of important ground. It should be drafted by an experienced LLC attorney licensed to practice in the LLC’s state of formation. As a business lawyer who has practiced law in Arizona since 1980 I’ve prepared 5,800+ Operating Agreements and spent hundreds of hours researching and revising my Operating Agreement.

How to Hire Arizona LLC Attorney Richard Keyt to Prepare an Operating Agreement

To hire Richard Keyt to prepare an Operating Agreement for your sole member Arizona or California LLC for $297 complete and submit his online Operating Agreement Questionnaire.

By | 2017-05-30T21:38:45+00:00 April 29th, 2017|General Information, Single Member LLCs|

Can a Single Member LLC be Taxed as a Partnership?

Question: Can a single member limited liability company be taxed as a partnership for federal income tax purposes?

Answer: No. The following text from the IRS’ website answers the question:

“Over the years, there has been confusion regarding Single Member Limited Liability Companies in general and specifically, how they can report and pay employment taxes.

An LLC is an entity created by state statute. The IRS uses tax entity classification, which allows the LLC to be taxed as a corporation, partnership, or sole proprietor, depending on elections made by the LLC and the number of members. An LLC is always classified under federal law as one of these types of taxable entities.

A multi-member LLC can be either a partnership or a corporation, including an S corporation. To be treated as a corporation, an LLC has to file Form Form 8832, Entity Classification Election (PDF), and elect to be taxed as a corporation. A multi-member LLC that does not so elect will be classified under federal law as a partnership.

A single member LLC (SMLLC) can be either a corporation or a single member “disregarded entity.” Again, to be treated under federal law as a corporation, the SMLLC has to file Form 8832 and elect to be classified as a corporation. An SMLLC that does not elect to be a corporation will be classified by the existing federal guidance as a “disregarded entity” which is taxed as a sole proprietor for income tax purposes.”

IRS Form 8832 is the form used by an entity to elect a method of federal income taxation that is different from the IRS’ default method (sole proprietorship or disregarded entity for single members LLCs and partnership for multi-member LLCs). This form is also known as the “check the box” form because an entity can elect a tax method by checking the box on the form. IRS Form 8832, question 3 reads:

Does the eligible entity have more than one owner?

Yes. You can elect to be classified as a partnership or an association taxable as a corporation.

No. You can elect to be classified as an association taxable as a corporation or to be disregarded as a separate entity.”

By | 2017-05-31T07:46:30+00:00 July 31st, 2016|LLC Tax, Single Member LLCs|