As the popularity of limited liability companies (LLCs) has increased, so have the number of ways for people to take advantage of their newfound protection. LLCs offer many benefits for business owners and investors alike. However, single member limited liability companies don’t enjoy the same legal protections as a regular LLC. Many states protect single member LLCs from creditors and lawsuits, but not all states do. If your LLC is incorporated in a state that doesn’t recognize them or if you operate one in your personal capacity without informing your state of its existence, then you may be out of luck when it comes to protecting yourself from creditors or lawsuits.
Single member LLCs are not recognized as a distinct entity in their home state. They are not protected by the laws of that state beyond what is provided by federal law as well as other applicable laws such as local business codes and regulations. This article will explore the extent to which different states protect single member limited liability companies and whether operating an unincorporated business may cause problems if you do end up being sued.
What is a Single Member LLC?
A single member LLC is a business owned and operated by one individual, who is called the “single member LLC member.” This owner can be a single person, an owner of a business that is owned by several individuals, or even a married couple. Each partner in a business is considered a separate and distinct business for the purpose of state laws.
The owners of a single member LLC are responsible for all the obligations and debts of the LLC. This means that if the LLC is sued, the owners are personally liable for the funds owed by the LLC. However, a single member LLC is not a corporation and does not have any of the protections offered by a corporation. This means that if someone sues the LLC and wins the case, they can collect from the owners who are personally liable for the debt. So, a single member LLC is a great way to open a business but is not a legal entity.
States That Protect Single Member LLCs
Massachusetts protects single member LLCs, as well as other businesses owned and operated by one person. California protects single member LLCs with or without a name. Georgia and Louisiana also protect single member LLCs. But, other states protect single member LLCs if certain conditions are met. For example, Arkansas and South Dakota protect single member LLCs if the owner has a net worth of $250,000 or more. Other states protect single member LLCs if the owner is an estate, trust, corporation, partnership, or an organization.
Single Member LLC has no Protection in the Following States
Before you decide to incorporate your business in a state where single member LLCs are not protected, consider the following states that do not recognize them. In most cases, these states do not recognize single member LLCs because they are unincorporated and do not have a name. This means that the business does not exist anywhere and is merely a collection of assets owned by one individual.
Wyoming, Nevada, Delaware, South Dakota, North Dakota, Oklahoma
Other Situations When a Single Member LLC May Be Protected
Certain circumstances give a single member LLC some protection. If the owner of a single member LLC is an estate, trust, corporation, partnership, or an organization, then the LLC might receive some limited protection.
Estate
A single member LLC owned by an estate may have some limited protection if the owner is sued. The assets of the estate are being depleted by the lawsuit. For example, if a husband is killed in an accident and his wife sues the person who was at fault, the wife may sue the husband’s assets including his business that he was operating as a single member LLC. In this situation, the wife may be able to sue the husband’s business and collect money from it. The only way for her to do this is to sue the husband’s single member LLC as a separate entity.
Trust
A single member LLC owned by a trust may have some limited protection if the trust created a revocable living trust that holds the owners’ assets for them. In this case, the trust would be able to sue the single member LLC for damages.
Corporation
A single member LLC owned by a corporation may have some limited protection if the owners of the LLC are the corporation’s officers and managers. They may be able to protect the LLC by taking over management of the company and facing the lawsuit on their own.
Which States Do Not Protect Single Member LLCs?
Several states protect single member LLCs, but they are not protected by the laws of any state. These states are: Nevada, Wyoming, South Dakota, North Dakota, Oklahoma, and Delaware. As you can see, each state has different laws and different regulations when it comes to LLCs. If you decide to incorporate your business in one of these states and don’t inform your state of its existence, you may be out of luck when it comes to protecting yourself from creditors and lawsuits. This is why it is so important to inform your state of your single member LLC’s existence.
Bottom Line
Single member LLCs are not protected by the laws of any state and are not recognized as a distinct entity in their home state. They are not protected by the laws of that state beyond what is provided by federal law, applicable laws such as local business codes and regulations, and the laws of other states. Because they are not a distinct entity, a creditor or plaintiff can easily target the assets of a single member LLC. This is why it is important to inform your state of your single member LLC’s existence.