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Editorial 10 MIN READ

The single-member LLC, revisited

Twenty months on, the formation has not changed; the state-by-state map around it has

The Editors
Staff, Incorporator.org
10 min read Updated
Contents 6 sections
  1. The charging-order map, still diverging
  2. Series LLC adoption keeps spreading
  3. Veil piercing in 2016 and 2017
  4. Self-employment tax, still pre-TCJA
  5. What a founder reading in December should actually do
  6. Sources

he single-member LLC in December 2017 is the same animal it was in April 2016: a disregarded entity for federal tax purposes, a creature of state statute for liability purposes, and cheaper than any lawyer's alternative. What has moved in the intervening twenty months is everything around it. State legislatures have kept adjusting charging-order protection, Series LLC statutes have spread past a dozen jurisdictions, and a handful of appellate opinions have sharpened the veil-piercing posture in ways that matter for a one-member entity.

This is a revisit, not a replacement. The mechanics of formation are where we left them. For the basics, see the single-member LLC, examined. The question here is what a founder reading in late 2017 needs to know that was not obvious last spring.

The charging-order map, still diverging

Charging-order protection is the rule, codified in every LLC statute, that a member's personal judgment creditor can reach distributions from the LLC but cannot foreclose on the membership interest, force a liquidation, or step into management. The point of the rule, borrowed from partnership law, is to protect the non-debtor members from being saddled with a stranger. In a single-member LLC there are no other members to protect, and that is the crack the asset-protection bar has spent the better part of a decade arguing over.

Florida is the anchor precedent. In Olmstead v. FTC, 44 So. 3d 76 (Fla. 2010), the Florida Supreme Court held that a judgment creditor of the sole member of a Florida single-member LLC could reach the entire membership interest, not just distributions, because the charging-order statute in force at the time (Fla. Stat. § 608.433) did not say it was exclusive for single-member LLCs. The legislature responded in 2011, and again in the 2013 revision that moved Florida's LLC law from Chapter 608 to Chapter 605 of the statutes. The current provision, Fla. Stat. § 605.0503, makes the charging order the exclusive remedy for a multi-member LLC but expressly carves out the single-member case, allowing foreclosure and other remedies "if the court determines that distributions under a charging order will not satisfy the judgment within a reasonable time." Florida, in other words, codified the Olmstead rule for single-member LLCs rather than overruling it.

Wyoming is the other pole. Wyo. Stat. § 17-29-503 makes the charging order the exclusive remedy for a judgment creditor of a member's interest, and the Wyoming statute makes no distinction between single and multi-member LLCs. Wyoming courts have not had occasion to test that against a determined creditor in a reported appellate opinion, but the statutory text is clean, and it is the pitch every Wyoming registered-agent shop has been making for a decade.

Delaware sits near Wyoming. 6 Del. C. § 18-703 provides that a charging order is "the exclusive remedy by which a judgment creditor of a member or a member's assignee may satisfy a judgment out of the judgment debtor's limited liability company interest." The provision does not single-member-qualify. Delaware has not revisited this since Olmstead, and the consensus in the Delaware bar is that the statute means what it says.

Texas is similarly strong. Tex. Bus. Orgs. Code § 101.112 restricts creditors to a charging order and forecloses any other remedy against the membership interest itself. The statute applies to LLCs generally, with no single-member exception.

Between those poles, most states are somewhere in between, and a few have followed Florida. Colorado, for example, has case law, In re Ashley Albright, 291 B.R. 538 (Bankr. D. Colo. 2003), that reached a similar result in bankruptcy: the trustee, stepping into the shoes of the sole member, could vote to liquidate the entity and reach the assets. Colorado's statute has been amended since, but the case continues to be cited for the structural point. Single-member LLCs are different from multi-member ones, and the difference is doctrinal, not cosmetic.

The practical advice has not changed and will not in 2018. If asset-protection is doing any meaningful work in the decision, pick Wyoming, Delaware, or Nevada for the formation state, accept that foreign-qualifying into the operating state gives that state's courts a say, and stop treating home-state single-member LLCs as asset protection. They were never that.

Series LLC adoption keeps spreading

Delaware enacted the original Series LLC statute in 1996 (6 Del. C. § 18-215), creating a single master LLC under which multiple "series" can hold distinct assets and liabilities with inter-series liability shields. The form sat quietly for most of its first decade. It has moved in the last several years. By the end of 2017, roughly fifteen states have Series LLC statutes on the books, including Illinois, Texas, Nevada, Oklahoma, Tennessee, Utah, Iowa, Kansas, Montana, Missouri, and the District of Columbia, with additional states in some stage of considering the form.

For a single-member founder, the Series LLC is an interesting middle path that mostly works if the assets are real estate. A landlord with five rentals can hold each property in its own series, ring-fencing the liability without paying five state filing fees and five registered-agent invoices. That is the pitch, and in-state it generally holds up against a slip-and-fall plaintiff in the same state. Out-of-state, the picture is less settled. A New York or California court asked to respect a Delaware Series LLC's internal shield has limited case law to consult and a statute that does not map cleanly onto its own. The same is true for bankruptcy: whether each series is a separate debtor under the Bankruptcy Code has been litigated inconsistently, and the IRS, through proposed regulations issued in September 2010 under IRC § 7701, has generally treated each series as a separate entity for federal tax purposes without having finalized the rule.

For a single-member operator in 2017 who is tempted, the honest sequence is: file the master in a state with a clean Series statute and favorable charging-order law, use the form only for assets in that same state, keep separate books and separate bank accounts for each series (or lose the shield the same way a careless SMLLC loses its veil), and do not assume any creditor in a second state will be impressed.

Veil piercing in 2016 and 2017

Courts have continued to pierce single-member LLCs at roughly the rate the 2016 piece described, and for the same reasons: commingling, undercapitalization, failure to observe the minimal formalities the statute requires, and conduct that treats the entity as a personal wallet. Two 2017 appellate decisions are useful to know about.

In Greenhunter Energy, Inc. v. Western Ecosystems Technology, Inc., 337 P.3d 454 (Wyo. 2014), which Wyoming courts continued to cite through 2017, the Wyoming Supreme Court affirmed a piercing judgment against the sole member of a single-member LLC where the member had undercapitalized the entity, ignored its separateness, and used it as an instrument to avoid a known liability. The opinion is notable because Wyoming is thought of as the strong state, and it showed that the statutory charging-order armor is not the same thing as a veil that cannot be pierced. Wyoming's shield still requires the member to act like there is an entity there.

Curci Investments, LLC v. Baldwin, 14 Cal. App. 5th 214 (Cal. Ct. App. 2017), approved the use of "reverse veil piercing" against a single-member LLC in California. Reverse piercing lets a creditor of the member reach LLC assets, rather than the usual direction of a creditor of the entity reaching the member. The California Court of Appeal reversed the trial court and held that reverse piercing was available where the facts showed the LLC was being used to shield personal assets from a judgment creditor. California's approach is not the national rule, and the Delaware Supreme Court expressly rejected reverse veil piercing against an LLC in Spring Real Estate, LLC v. Echo/RT Holdings, LLC, C.A. No. 7994-VCN (Del. Ch. Feb. 18, 2016), on different but related facts. The upshot for 2017 is that the direction of the piercing doctrine is not one-way: courts are developing tools in both directions, and single-member LLCs are the easiest targets in both.

Indiana and Colorado have continued producing the kind of piercing cases that academic summaries compile. The common thread across every piercing opinion from this period is behavioral, not structural. The LLCs that held up had operating agreements, separate bank accounts, documented distributions, and a paper trail that treated the entity as a distinct person. The LLCs that lost did not.

Self-employment tax, still pre-TCJA

For federal tax purposes, a single-member LLC remains a disregarded entity under Treas. Reg. § 301.7701-3, the "check-the-box" regulation first promulgated in 1996 and still the governing rule in December 2017. An eligible domestic entity with a single owner that does not elect corporate treatment is disregarded as an entity separate from its owner. The owner reports the business on Schedule C, Schedule E, or Schedule F as appropriate. Nothing about that default has changed since we last wrote.

The self-employment tax exposure under IRC § 1402 is likewise unchanged. Net earnings from self-employment are subject to the combined 15.3% Social Security and Medicare tax up to the wage base (which Social Security Administration sets at $127,200 for 2017 and has announced as $128,400 for 2018), with the 2.9% Medicare portion continuing above the cap and the 0.9% Additional Medicare Tax under IRC § 1401(b)(2) kicking in for higher-income filers. The question that keeps coming up, whether a single-member LLC owner who is passive in the business can avoid SE tax on the distributive share, has not been resolved any more clearly than it was eighteen months ago. The IRS's long-running position, built on the proposed regulations under § 1402(a)(13) from 1997, is that members who materially participate owe SE tax on their share; the regulations were never finalized, and Congress imposed a moratorium on finalizing them that has quietly lapsed without action. The practical effect for a single-member LLC is that the disregarded-entity default puts all active business income on Schedule C, where SE tax is automatic, and the elective S-corp path is the one way most operators reduce the bill.

That elective path has not changed either. Form 2553 election, a reasonable W-2 salary, and distributions that escape SE tax on the employer-portion logic. The crossover where the election starts earning its cost is still in the neighborhood of $40,000 to $50,000 of net profit. A House tax bill passed November 16 and a Senate version passed December 2 are now in conference committee, and both contain a pass-through deduction whose scope and mechanics will materially rewrite this calculus for 2018 forward. We will take that up when the conference report prints. Nothing a founder does in the last three weeks of 2017 should turn on it yet.

What a founder reading in December should actually do

The answer has not moved much. Form in the state you operate in unless there is a specific, dollar-weighted reason to pay for a Delaware or Wyoming charter. If there is (real asset-protection concern, material creditor exposure, a real estate portfolio), pick the strong-charging-order state, foreign-qualify properly, and behave like a separate legal person. Skip the Series LLC unless the portfolio is all in one state and the state has a Series statute. Keep the operating agreement, the EIN, the bank account, and the check-the-box default, and revisit the S-corp election when net profit crosses the threshold where the payroll tax savings exceed the compliance cost.

The single-member LLC in late 2017 is a mature form. The case law around it is getting more granular, the statutory map is getting more divergent, and the federal tax treatment, for three more weeks at least, is the same as it was twenty months ago.

Sources

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