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Editorial 10 MIN READ

Single-member LLC, a field report

Twenty months after the last revisit, the 199A regulations have printed, the charging-order map has kept drifting, and the reverse-piercing doctrine has traveled

The Editors
Staff, Incorporator.org
10 min read Updated
Contents 6 sections
  1. The 199A final regulations, what they actually do
  2. The wage base, and what the payroll math looks like in 2019
  3. Charging orders, still diverging, with Florida as the anchor
  4. Reverse veil piercing, traveling
  5. Formation defaults, still check-the-box
  6. Sources

he single-member LLC in August 2019 is the same disregarded entity it was in April 2016 and December 2017, but three things around it have moved enough to justify a field report: the Treasury printed the final Section 199A regulations in February, the Social Security wage base stepped up to $132,900 for the year, and the reverse veil-piercing doctrine that California adopted in 2017 has traveled farther than the asset-protection bar expected.

This is a follow-up, not a restart. The mechanics of formation and the reasons to pick this form over a sole proprietorship or an S-corp election are covered in the 2016 piece and the December 2017 revisit. What follows is what a founder reading in the last week before the summer ends should know that was not settled eighteen months ago.

The 199A final regulations, what they actually do

Treasury published T.D. 9847 in the Federal Register on February 8, 2019, finalizing the core regulations under IRC § 199A, the qualified business income deduction enacted in the 2017 Tax Cuts and Jobs Act. The package runs to more than 250 pages of preamble and rule text and answers most of the questions that were open when the proposed regulations came out in August 2018. For a single-member LLC, the operative provisions are in Treas. Reg. § 1.199A-1 through § 1.199A-6, with the aggregation rules at § 1.199A-4 and the specified service trade or business (SSTB) rules at § 1.199A-5.

The structural result has not changed from the proposed regulations. A disregarded single-member LLC with qualified business income below the 2019 threshold amounts ($160,700 for single filers, $321,400 for joint filers under Rev. Proc. 2018-57 adjusted for inflation) gets a deduction of 20% of QBI, subject only to the overall taxable-income cap. Above the threshold, the deduction is limited by either the W-2 wages the trade or business pays or a wage-and-property formula, and SSTBs (health, law, accounting, consulting, financial services, and several others) phase out entirely over the phase-in range.

Three things in the final package matter more than the headline.

First, § 1.199A-5(c)(1) adopts a de minimis rule for SSTB taint that is narrower than many tax advisors expected. A trade or business with more than $25 million in gross receipts is treated as an SSTB if 5% or more of gross receipts is attributable to a specified service activity. For businesses with $25 million or less, the threshold is 10%. That cuts off a planning move that had been proposed in early 2018 of splitting a consulting practice and a product line into two entities to keep the product side eligible. It still works, but the SSTB activity has to stay truly de minimis in the product entity, and the preamble to T.D. 9847 warns against structures whose only purpose is to strip the service character out.

Second, § 1.199A-4 lets a taxpayer aggregate trades or businesses for purposes of the W-2 wage and UBIA limitations, but not for the SSTB determination. For a single-member LLC owner with multiple entities, the aggregation election is made annually and is binding going forward once made; the statement requirements in § 1.199A-4(c)(2) are specific, and a return that qualifies for aggregation but omits the statement loses the election for the year. This is the kind of procedural detail that trips up self-prepared returns and is a reason an SMLLC owner above the threshold should have a preparer who has actually read the final regulation.

Third, § 1.199A-5(d) addresses the employee-versus-independent-contractor question that loomed over the proposed regulations. A worker previously treated as an employee who starts providing the same services as an independent contractor to the same employer is presumed, for three years, to still be an employee for 199A purposes. The presumption is rebuttable, but the burden is on the taxpayer. For a single-member LLC that was formed to catch a severed employee's 1099 income, the presumption is a real obstacle and a reason to document, at formation and thereafter, that the relationship is actually different.

For an SMLLC owner below the threshold, none of this matters; the 20% runs clean against QBI. For owners above the threshold, the regulation is the operative document and, where a preparer's position diverges from the proposed rules they relied on in 2018, it is the one that controls the 2018 return being filed now on extension as well as the 2019 return that is accruing.

The wage base, and what the payroll math looks like in 2019

The Social Security Administration set the 2019 contribution and benefit base at $132,900, up from $128,400 for 2018. The 12.4% Social Security portion of self-employment tax stops at that ceiling. The 2.9% Medicare portion does not, and the 0.9% Additional Medicare Tax under IRC § 1401(b)(2) kicks in at $200,000 for single filers and $250,000 for joint filers.

For a disregarded SMLLC, all active business income flows through to Schedule C and is subject to self-employment tax on the owner's Form 1040. The crossover for the S-corp election (covered in the 2017 revisit) has shifted with the interaction between 199A and reasonable compensation. Under § 199A, wages paid by an S-corp are not QBI; they are compensation, which reduces the deduction. For an SMLLC owner just over the threshold, the S-corp election can now cost 199A deduction dollars that the sole-proprietor SMLLC would keep, and the payroll-tax savings have to exceed that loss to pencil out. Below the threshold, the election remains a pure payroll-tax play and the old rule of thumb (roughly $40,000 to $50,000 in net profit to break even, more above that) continues to apply.

The practical point is that the S-corp election became harder to analyze casually in 2018, and the final 199A regulations in 2019 sharpened rather than simplified the tradeoff. An SMLLC owner whose taxable income is within $30,000 of the 199A threshold should run the numbers both ways before electing, because the deduction lost on wages can exceed the payroll tax saved on distributions.

Charging orders, still diverging, with Florida as the anchor

The charging-order map described in the 2017 revisit has not resolved; it has become more granular. Florida's position remains the anchor for states skeptical of single-member shields. Fla. Stat. § 605.0503(4), the provision enacted after Olmstead v. FTC, 44 So. 3d 76 (Fla. 2010), makes the charging order the exclusive remedy in a multi-member LLC but expressly permits foreclosure and other equitable remedies against the interest of a member in a single-member LLC "if the court determines that distributions under a charging order will not satisfy the judgment within a reasonable time." Florida courts have applied the carve-out in the intervening years without narrowing it, and the Florida trend has been followed in bankruptcy treatments in Colorado and several other jurisdictions whose statutes do not single-member qualify but whose courts have borrowed the structural reasoning.

Wyoming and Delaware remain the strong-charging-order poles. Wyo. Stat. § 17-29-503 and 6 Del. C. § 18-703 both make the charging order the exclusive remedy without regard to member count. Texas is comparably strong under Tex. Bus. Orgs. Code § 101.112. Nevada sits with them. For SMLLC asset-protection planning in 2019, the core calculus has not changed: form in a strong-charging-order state if the exposure warrants it, foreign-qualify honestly into the operating state, and recognize that the operating state's courts will have something to say about local tort claims regardless of where the charter sits.

The Florida Supreme Court's Olmstead logic, that a single-member LLC has no other member to protect from a creditor stepping into management, continues to be the intellectual engine behind every single-member carve-out in the country. States that have resisted carving out have done so as a policy choice rather than a doctrinal one, and the Olmstead reasoning remains available to any state court asked to reach through a charging-order statute in a sympathetic fact pattern.

Reverse veil piercing, traveling

The 2017 revisit flagged Curci Investments, LLC v. Baldwin, 14 Cal. App. 5th 214 (Cal. Ct. App. 2017), as California's adoption of reverse veil piercing against a single-member LLC, and noted that Delaware had rejected the doctrine in Spring Real Estate, LLC v. Echo/RT Holdings, LLC, C.A. No. 7994-VCN (Del. Ch. Feb. 18, 2016). The intervening eighteen months produced a federal appellate decision that has moved the doctrine beyond California.

Sky Cable, LLC v. DIRECTV, Inc., 886 F.3d 375 (4th Cir. 2018), applied Delaware law to pierce the veil of three single-member LLCs in reverse, allowing DIRECTV to reach the LLCs' assets to satisfy a judgment against their sole member. The Fourth Circuit reasoned, over a dissent, that Delaware courts would recognize reverse veil piercing in a sufficiently egregious fact pattern, notwithstanding the posture of the 2016 Chancery decision. The opinion has been cited through 2018 and 2019 by federal and state courts outside the Fourth Circuit as persuasive authority for reaching through a single-member LLC whose member uses it to shield personal assets. A Delaware Chancery or Supreme Court decision on point would settle the question for Delaware entities; as of this writing there is none, and the Fourth Circuit prediction stands in as the most authoritative federal read of the Delaware law on this point.

For an SMLLC owner, the operational implication is the one the 2016 piece made and the 2017 revisit repeated. The veil, in either direction, is behavioral. Operating agreements that exist, capital contributions that are documented, distributions that are accounted for, and bank accounts that are never used to pay personal bills are the facts that survive a piercing motion. The statute is the floor. The conduct is what matters.

Wyoming's own Greenhunter decision from 2014, still the leading Wyoming Supreme Court opinion on piercing an SMLLC, continues to be cited for the proposition that undercapitalization plus disregard of the entity equals piercing even in a state whose charging-order statute is as clean as Wyoming's. The strong-state charter is not a substitute for separation. It was never meant to be.

Formation defaults, still check-the-box

None of this moves the default federal classification. Treas. Reg. § 301.7701-3, unchanged since the 1996 check-the-box regulations finalized and the 2003 amendments that tidied up the multi-member rules, still makes an eligible domestic entity with a single owner a disregarded entity unless the owner elects corporate treatment on Form 8832. The owner reports the business on Schedule C, E, or F as appropriate, picks up whatever 199A deduction the statute allows, and pays self-employment tax at the IRC § 1401 rates to the SSA wage base.

The Form 2553 election path, covered in the 2017 revisit, remains the way most SMLLC owners above the payroll-tax crossover reduce SE tax. The election has gotten more delicate under 199A, as described above, but the mechanics have not changed. File the 2553 within the window of Rev. Proc. 2013-30 if late, run a reasonable salary, and keep the documentation that makes "reasonable" defensible if the IRS asks.

For a first-time founder reading this in August and picking between forms, the prescription is the same as it was in 2017: form a single-member LLC in the operating state unless there is a specific reason to charter elsewhere; execute an operating agreement that recites the LLC is a separate legal person; get the EIN; open the bank account; document the contributions; and revisit the S-corp question once the 2019 numbers close. The SMLLC in 2019 is a mature, boring, reliable form. The litigation around it is where the interesting movement is, and the interesting movement has mostly sharpened the already-correct advice rather than unsettling it.

What has not changed, and is worth saying plainly before closing: no amount of statutory charging-order protection saves an entity whose owner treats it as a personal wallet, and no final regulation under 199A helps a return prepared without reading the final regulation. The form works because the conduct around it works. In that respect, 2019 looks exactly like 2017, which looked exactly like 2016.

Sources

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