Single-Member LLCs

Scope of the chapter. The single-member LLC is the most common form of LLC in use. It holds a single parcel of real estate, an operating business owned by one entrepreneur, an investment account, a subsidiary of a corporate group or a special-purpose vehicle in a financing. Its popularity rests on a combination no other form offers: a statutory liability shield, freedom from corporate formalities, and, by default, no separate federal income tax return. This chapter examines the legal consequences of having only one member. It traces the statutory recognition of the form, discusses the operating agreement of a single-member LLC, summarizes its tax treatment, and then turns to the three areas in which the number of members matters most: veil piercing, creditor remedies against the member's interest, and the death, incapacity or bankruptcy of the member. It closes with planning guidance.

Why the number of members matters. Much of LLC law was built on the assumption that an LLC would have several members. The charging order exists to protect the other members from having a creditor of one member forced into their venture. The rules on transfer of interests exist to let the members choose their associates. Fiduciary duties exist to protect members from one another. When there is only one member, several of those rationales disappear. Courts and legislatures have responded in different ways. Some have extended creditor remedies against a sole member's interest on the ground that the charging order protects no one but the debtor. Others have legislated that the charging order is exclusive whatever the number of members. Some courts have treated single ownership as a factor favoring veil piercing, and at least one legislature has forbidden its courts to do so. A practitioner advising on a single-member LLC must know which approach applies in the relevant jurisdictions and must plan for the possibility that a court in another jurisdiction will take a different view.

Organization. The chapter proceeds in nine parts:

1. the statutory recognition of the single-member LLC (¶ 910);
2. the single-member operating agreement (¶ 920);
3. federal and state tax treatment (¶ 930);
4. the liability shield and veil piercing (¶ 940);
5. charging orders and the sole member (¶ 950);
6. bankruptcy of the sole member (¶ 960);
7. reverse veil piercing and other creditor remedies (¶ 970);
8. death, incapacity and succession (¶ 980); and
9. planning the single-member LLC (¶ 990).