Some entrepreneurs are mistakenly reluctant to form a single member LLC because they’ve heard the entity is treated like a sole proprietorship.
Yet that’s only partially true. Here’s why.
Tax Treatment Election
When you form a single member LLC, you have the ability to have it treated as a sole proprietorship or as a corporation for taxation purposes. You should consult with your business lawyer and accountant before making the election so that you’re both protecting yourself from a legal standpoint and minimizing the federal and state taxes you will pay.
Related Article: Who Can Sign Legal Documents For A Texas LLC?
However, if you choose tax treatment as a sole proprietorship, that’s not the same thing as having all of the personal liability of an actual sole proprietorship. For example, the single member limited liability company may shield you from personal liability in a civil lawsuit against the business where there would be no shield if the venture was a sole proprietorship.
Can There Be Personal Liability With A Single Member LLC?
Yes. Whether you have a limited liability company (single or multi-member) or a corporation (C corp or S corp), there are certain exceptions to the liability shield that exist. Here are three common areas where there can be personal liability.
1. Environmental Liability
If your business violates federal or state environmental laws (e.g. dumping toxic waste into a local river), you may be personally liable for the cleanup expenses in addition to your business entity also being liable.
2. Taxes
One can’t evade taxes by claiming an entity as a shield. The IRS and your state’s department of revenue will get their pound of flesh no matter what type of entity you use.
3. Alter Ego – Piercing The Corporate Veil
The shield provided by your single member liability company may be pierced to make you personally liable on some civil claims if you’ve engaged in misconduct. For example, if you’re not observing the legal formalities required to maintain the shield.
Now this frequently occurs where an entrepreneur uses a single personal bank account for both personal living expenses and as the business account for the entity. In short, if you act as if the entity doesn’t exist separate from your personal life, chances are the courts will reject the liability shield it would otherwise provide you.
Where To Get A Texas Single Member LLC Set Up
You can try to set up your own Texas single member limited liability company or use an online company. However, both of those options are risky.
Related Article: LLC Operating Agreement – Why It’s Important To Have One
The best method is to use an experienced Texas business contracts lawyer who knows how to form a single member LLC correctly, provide you the legal advice you need, and get you the right legal paperwork run the LLC (customized operating agreement, business contracts, etc.).
