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I am thinking about a one-person consulting business. Your book says that single member LLCs are bad, because the IRS views them as a sole proprietor, but a CPA that I know says that the state of Texas still recognizes them as entities for legal purposes. Why is this bad? The CPA also says that a sole proprietor can get the "same" liability protection with a business liability insurance policy. Why do I want to go to the trouble of forming a LLC? | | 
Your CPA is correct in that the state of Texas recognizes Single-Member LLCs as entities, however he isn't giving you the entire picture. When it comes to the federal government -- more specifically, the IRS -- Single-Member LLCs are not recognized as partnerships. For tax purposes, the IRS considers them "disregarded entities". This doesn't mean much as far as your tax bill goes -- the differences are minimal. However, the reasons I am not so keen on Single-Member LLCs aren't due to the tax implications, it's more the legal issues... As far as I know, there is no specific law in Texas which states that in the event of a lawsuit Single-Member LLCs are to be considered disregarded entities or sole-proprietorships (as the IRS has resigned them to) however, in my opinion, there is not enough case law to substantiate that they are to be offered the same liability protections as standard LLCs either - especially when it comes to the charging order protections that LLCs provide. After all, charging order protections were set up to protect the other partners in the business and if there are no other partners then… well, you get the picture. As for insurance policies, I hate it when advisors advise that this is the be all and end all of asset protection. While insurance policies are prudent, the truth of the matter is that when the time comes very few insurance companies want to actually pay out. They have lists of exclusionary circumstances which compete with the size of the "LLCs For Dummies" book you're reading. In my opinion, giving a trusted friend or relative one or two percent of your membership shares is the best insurance policy you can buy, but, that's just my opinion. ;-) - Jen | | |
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