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ComplianceJuly 07, 2022

What states protect single-member LLCs?

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Single-member LLCs (SMLLC) are one of the most common entity types in the United States. If you choose to operate as a single-member LLC, your business is recognized as having one owner (unlike a multi-member LLC that has more than one owner).

A single-member LLC has most of the advantages of a multi-member limited liability company, including asset protection, which is critical to protecting the business interest of owners/members. As a rule, a single-member LLC is considered a separate legal entity from its owner. This means that the owner’s personal assets are shielded from any debts and liabilities incurred by your LLC.

However, there are some exceptions to this rule under state and federal law. Let’s take a look.

Single-member LLCs and piercing the veil

When the veil is pierced, the owners of an LLC lose the limited liability that their business entity has provided. This means their personal assets can be seized by creditors to pay off business debts and liabilities.

Single-member LLCs are particularly vulnerable to corporate veil piercing since liability laws have traditionally applied to multi-member LLCs and have only relatively recently been expanded to single-member LLCs.

The criteria by which a creditor can pierce the corporate veil varies by state. Generally, the following two conditions must be met:

  1. A unity of interest between the single-member LLC and its owner is present. I.e., the plaintiff must demonstrate that the single-member LLC is not a separate entity from its owner/member.
  2. The plaintiff must prove that piercing the corporate veil is needed to avoid fraud or other unfairness. In other words, the plaintiff must demonstrate that the single-member LLC is using the company to intentionally lie or cause harm.

To protect the entity, a single-member LLC must demonstrate that the business exists separately from itself. This involves ensuring timely compliance with annual filing requirements and filing fees in the state in which the LLC is incorporated and creating and maintaining an operating agreement.

Single-member LLC owners must also keep their business assets separate from their personal. The best way to do this is to maintain a separate business bank account and credit card, and only use these for business expenses.

Changing order protection and asset protection

Single-member LLC asset protection can also be jeopardized if a changing order protection is imposed by a creditor on distributions from the business entity. A charging order is a court-authorized lien that protects non-debtor members of an LLC from being forced into partnership with the owner’s creditor.

However, because a single-member LLC has just one owner, there are no non-debtor members to protect. Subsequently, the business can be liquidated, and the proceeds used to satisfy a judgment claim by the creditor.

Certain states, including Alaska, Delaware, Nevada, South Dakota, and Wyoming, have amended their LLC laws to ensure that single-member LLCs have the same protection from creditors as multi-member LLCs. Meanwhile, in Florida and New Hampshire, LLC laws have been changed to limit the liability protection of single-member LLCs compared with multi-member LLCs.

Is there a “best state” for single-member LLCs?

Deciding where to form your LLC can be heavily dependent on how protected your assets are from potential creditors. But other factors come into play too:

  • LLC fees and filings – If your LLC is organized in a state other than the one where you do business, it will have the initial added expense of registering as a foreign LLC in the state where it is operating. Filings include the initial filings, annual reports, and other required information reports, such as a change of registered agent.
  • Management flexibility and simplicity – Some states impose more requirements on LLCs than others do.
  • Tax obligations (such as franchise taxes) and, conversely, any tax incentives.

To learn more about how to set up an LLC, contact BizFilings today.

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