Law in the Marketplace: Six questions when forming a single-member LLC

For the Monitor
Published: 2/27/2021 3:36:51 PM

If you’re starting a New Hampshire single-owner business and you decide to hire a lawyer to assist you, here are the six questions you should ask your lawyer, with brief summaries as to how your lawyer should answer them. Your lawyer will want to expand these answers. For clarity, I’ll state the six questions in italics.

1. Will my single-member LLC need a written operating agreement?

Yes. You will need a written operating agreement in order:

■to protect you from lawsuits against your LLC by third parties,

■to define the management structure of your LLC,

■to ensure you maximize your Internal Revenue Code section 199A pass-through deduction,

■for estate planning purposes, and

■in case a bank, a potential investor or another third party wants to review your operating agreement.

2. Do I need to form a single-member LLC to conduct my business if I have no employees, if I don’t work regularly with independent contractors or other third parties, and if I won’t need to provide personal guarantees for any office rental, equipment purchase or otherwise?

Probably not. In the situation you describe, you should probably just conduct your business as a New Hampshire state-law sole proprietorship. This is because if third parties ever sue your business, they’ll also sue you in your own name as well as in the name of your business, and an LLC statutory liability shield won’t help you.

However, although you won’t have to file any formation document with New Hampshire to start a New Hampshire state-law sole proprietorship, you should issue a power of attorney to a third party to manage your LLC in the event that, because of illness or otherwise, you can’t manage it yourself. Also, you should state in writing what should happen to your business assets if you die while you’re operating your sole proprietorship and you don’t have an estate plan that addresses these issues. And you should file that writing where it will be found by a family member or friend upon your death. Finally, your state-law sole proprietorship, like any other type of business organizations, should have ample business liability insurance.

3. If I should conduct my single-owner business as an entity with a statutory liability shield rather than as a state-law sole proprietorship, should this entity be a single-shareholder business corporation rather than a single-member LLC?

Your entity should be a single-member LLC. For both legal and tax purposes, a single-member LLC is much more flexible and much easier to form than a single-shareholder corporation.

4. Assuming that I conduct my business as a single-member LLC, what should be my LLC’s federal tax structure?

The issue here is the 20% federal income tax deduction potentially available to you under section 199A, mentioned above, on your business income from your single-member LLC. This structure will probably depend on your individual taxable income in the year of your LLC’s formation if you’re single and on your joint taxable income if you’re married. You should probably be subject to federal income tax in your own name as a sole proprietorship if you’re single and your taxable income is $164,925 or less; and, if you’re married, if your joint taxable income is $329,800 or less. Otherwise, your single-member LLC should probably elect to be an S corporation.

5. Is there any reason why I should conduct my business as a two-member LLC rather than as a single-member LLC?

Yes, there are at least three possible reasons, and you should explore all of these reasons with your lawyer.

■First, if your business is a two-member LLC (for example, a husband-wife LLC), you may be able to save substantial federal Self-Employment Taxes under an IRS proposed regulation called Prop. Reg. § 1.1402(a)-2 (which can’t be used by single-member LLCs).

■Second, if you do business as a two-member LLC, you’ll arguably have better protection against veil-piercing. (Veil-piercing is a judicial doctrine, under which you may be personally liable for debts of your LLC. Veil-piercing is dangerous event for multi-member LLCs but especially so for single-member LLCs.)

■Third, a two-member LLC may provide you with estate planning reasons.

6. Is there any reason why I should form more than one entity to conduct my new business?

Yes. If, when you start your business or reasonably soon thereafter, your business will have valuable business assets, you should form two new entities — namely, a holding company and an operating company. The holding company will hold your business assets and lease them to your operating company. The operating company will use these assets to operate your business, but won’t engage in business with third parties. This holding company/operating company structure will protect your business assets from suits by third parties, since any suit against your business will be against your operating company — which won’t have any assets.

But don’t just rely on this column for answers to the above six questions. Ask your lawyer.

John Cunningham is a Concord, NH lawyer of counsel to McLane Middleton, P.A. His practice is focused on LLC formations, general business and tax law, advising clients under IRC section 199A, and estate planning. His telephone number is (603) 856-7172, his e-mail address is lawjmc@comcast.net, and the link to his website is www.llc199A.com.




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