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Single member LLC
8 points by aedr 887 days ago | 12 comments
I am looking into setting up a single member LLC. While doing my research, I've come across a few articles where the corporate veil was pierced for SMLLCs for various alter-ego reasons (e.g. not filing an 8832 with IRS which I found surprising). I do have a meeting with a lawyer set up next month but want to be as knowledgeable as possible before I go there.

1- Do you have any ideas/links about the safest way to set up a single member entity that would shield me from personal liability? I live in WA if that is relevant.

2- If I incorporate/LLC in say Nevada/Wyoming (which seem to have good SMLLC protection), but still do my business, foreign register and live in another state (WA), which law would typically be applied if I'm sued externally by (a) someone in WA, (b) someone in NV or (c) someone outside of both. i.e. do I really get any protection incorporating/LLC-ing outside my home state or will the states apply their own laws making it moot?




If you're going to do business with, and particularly solicit investment from, the public, you want a good level of protection from the inevitable lawsuit.

Single-member entities do little to shield you if you get sued and they want to pierce; if someone's got you in their sights and considers asking the court to disregard the corporate entity, enrolling yourself in one of these single member jobbers is like painting a big red target on your back. Your attorney may differ, but I believe it's dumber than just going in as a sole proprietor.

You can get sued anywhere for anything, but plaintiffs can and will sue your entity from the friendliest jurisdiction (and that's typically where the business deal went down). Showing up to court with an out-of-state corporate identity when you've always conducted business in your present state is strike two, before you even sit down.

Say your business craters, you go broke, and _then_ you get sued. Many states won't even let you defend your company in court unless you are (or hire) a licensed attorney.

The safest way to set up a single member entity is to get additional members. Member #2 ensures the plaintiff will have a harder time calling the LLC your "alter ego", a contrivance you set up to screw the customer/investor/government out of taxes.

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Thanks for the reply mchannon. Am I to understand from your response that even if I maintain the proper required formalities, and treat the corporation as a separate entity, that the veil may still be pierced? Is this common or exceptional?

The business I mentioned is internet-based and spans all the states. I just happen to live in WA.

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As with all court actions, it's not what you did that matters, but rather what they want the court to think you did.

Engaged in fraudulent business practices?

Commingled funds?

Used the corporate entity to further these goals?

Sure you didn't. But now you have to prove it in court with the rules biased against you. Spend $10k+ on an attorney (and sit through court proceedings for months) or settle for $10k+ even though they're wrong and they're just shaking you down.

Take steps ahead of time to make your venture a less attractive target (lawyers chase money- either their client's or yours). Make it not worth their while, and you will significantly decrease your chances of landing in court. The easiest step? Don't be a single member LLC.

If you're an internet retailer, companies like Amazon have in past years located out of OR where there is no sales tax (thus providing a competitive advantage).

Other than setting up in Oregon to avoid sales tax, or setting up a C-corp out of Delaware if you're going to raise funding as a serious startup, you get no benefits (and some drawbacks) setting up out of state.

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Thanks for the detailed reply mchannon.

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I live in WA. Email's in profile. Ping me for coffee if you're in Vancouver.

One thing that has occurred to me after I formed an LLC, is that being a sole proprietor with a DBA, while considered somehow, amateurish, has one advantage. You need to be a lawyer to represent somebody else in court, even if that "somebody else" is your single member LLC. However, if somebody sues you as a sole proprietorship, you just show up in court with no money out of your pocket. Since, you need to guarantee your line of credit, etc, with personal property anyway, the whole LLC "corporate veil" attempt, which often/usually fails anyway, seems of little value to me, for most single member LLC's.

This is all just my opinion, and I am not following my own advice, but I might follow it in the future.

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Thanks for the perspective pdx.

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  Is this for your company, or a pass through entity (shell)? I disagree with Mchannon.  A sole proprietorship is never better than a protected entity. 

 Yes a veil can be pierced, but at cost of discovery (and you must have real assets worth spending the time & effort to pierce).

 If you're soliciting outside investors - an LLC can later be "upgraded" to a C-Corp. If it's for asset protection (eg: all I.P. is held by one entity, and licensed to another) - if you have sizeable assets - get a lawyer. Otherwise, get on to building an actual business, earn enough to make it worthwhile - and hire a lawyer.  IMHO.

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Thanks czbond.

Yes it is for my company which is basically meant to be a niche website whose access based on monthly subscription (i.e. users from all over the US pay every month for access). My "office" is in WA.

I was looking for how to make a single-member LLC that would offer me the most personal protection, for lawsuits both by users (though right now I don't see why that would happen) and potentially from similar companies for some kind of infringement. I would of course separate the entity records/transactions from my personal ones. mchannon's perspective seems to be that even if I do everything by the book I still look like an appealing target as a SMLLC which could cost me time and money even if it holds.

From most of the replies above it seems like there are issues with the SMLLC as a choice - what are your thoughts on this?

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My advice, invest your time and energy in selecting the right attorney and accountant rather than developing a cursory knowledge of the field. Or to put it another way, presupposing that a single member LLC is the starting point may not be the right choice. Hire people who you trust to know the best choice off the top of their head.

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Will do, thanks. The cursory knowledge is mostly to be able to get a feel as to whether I'm dealing with a knowledgeable lawyer when meeting with them, rather than putting my trust in the wrong one.

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What you want is someone who can point to a couple of dozen examples of clients in similar circumstances - i.e. references.

What you don't want is someone who thinks that an online service is like a drycleaner or accounting office.

There are many areas where a general practitioner is fine. I am not sure that you are in one of them because of the nature of internet goods and the complexities of interstate commerce.

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insurance can help as well. I'm not sure if they have errors and ommissions for type of business your in. Also, for $350 you can do a patent search which could find potential patents in your area. which could be over kill. Also, a personal liability rider can add a layer of protection. If someone sues they not only do they have to deal with your lawyers but your insurance companies attorneys as well.

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