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Single Member LLCs – Be Careful

LLCs are a hybrid of partnership law and corporate law – they can have the liability protection of a corporation and the informal flexibility of partnerships (no requirement for corporate minutes and partnership profits can be allocated as partners see fit).

Single member LLCs (LLCs owners are “members”) are an anomaly. They are a partnership with only one partner. The concept is to give single owner LLCs the same protection as mult- owner LLCs. The problem is that while the state statutes  afford single member LLCs protection, the courts don’t.

In Martin v. Freeman, ___ P.3d ____, 2012 WL 311660, 2012 COA 21 (Colo.App., Feb. 2, 2012). Full Opinion at a single member LLC, Tradewinds LLC, signed a contract to build an airplane hanger for a customer. Tradewinds LLC’s only asset was an airplane. When Tradewinds was sued by the customer over the hanger, Tradewinds LLC owner sold its only asset, the airplane, and distributed the cash to himself. This left Tradewinds LLC without any assets to satisfy the judgment, so the trial court pierced Tradewinds’ veil and held Freeman personally liable for the damages.

There is a strong dissent in this case, and it can be argued it was a bad decision. But the court ruling is not inconsistent with other rulings where the courts didn’t honor a single member LLC.

We don’t recommend single member LLCs. Better to have two owners. If it’s a family business, name husband and wife as the owners and file a partnership return. And follow the basic formalities required of any business:

1. Have enough capital in the business to operate the business and pay the business expenses and service the business debt.

2. Keep the business separate from yourself – treat it as a separate business (its own tax id# and bank account).

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