Authors: Attorney John C. Mitby & Law Clerk Elizabeth L. Spencer
Phone: 608-575- 4077
If you are looking to start your own solo enterprise, you might be considering forming a single-member limited liability company (LLC). An LLC is a business entity that has both characteristics of a corporation and a partnership. Similar to a corporation, an LLC provides limited liability to its members (for most matters) but similar to a partnership, it allows for pass- through taxation to the members. Formed in the same manner as a multimember LLC, the single- member LLC can be owned by either a corporation or an individual, but has certain considerations that must be taken into account in order to fully take advantage of its limited- liability status. This article focuses on those single-member LLCs owned by individuals.
In 1994, Wisconsin enacted 1993 Wisconsin Act 112 creating Chapter 183 of the Wisconsin Statutes to govern the registration, formation, and operations of limited liability companies. To form an LLC, you must first file Articles of Organization with the Department of Financial Institutions. The articles can be filed online or through mail and the Department provides a form with the requirements. As required by Wis. Stat. § 183.0202, the Articles must include:
A unique name that includes “LLC” or “limited liability company” as a part of it. You can check your proposed name online to see if it is already in use. You may also choose to google the name to see if there is a similar name being used in the same line of business. The name of the LLC must be distinguishable from that of any other corporation, LLC, limited partnership, or limited liability partnership names registered with the Department. Finally, you may wish to consult an attorney on intellectual property matters if you are concerned about potential trademark issues.
The name of the person who will act as the registered agent. If a suit is ever filed with the LLC as a party, it will be served to the agent. You may act as the agent to your LLC.
The address of the registered office.
Indication of whether the LLC will be manager-managed or member-managed. As indicated by their names a manager-managed LLC may hire a manager who is not a member but the manager of a member-managed LLC must also be a member. You may be the manager of your own LLC.
The name of the organizer. You may be the organizer of your LLC.
While not required, generally the members of an LLC will adopt an Operating Agreement to govern the LLC’s operations. An Operating Agreement describes the responsibilities, rights, and duties of members and allows an LLC to alter the default rules provided in the Wisconsin Act. In accordance with Wis. Stat. § 183.0102(16), the Agreement must be in writing. However, unlike the Articles, the Agreement does not need to be filed with the Department of Financial Institutions. It may seem unnecessary to have an Agreement where the LLC is member-managed as the sole member does not need to come to an agreement with any other member. However, Agreements have advantages to them that make even a simple one important. The primary reason to establish a single member LLC is to limit the liability of the owner. Creating an Agreement adds substance to the fact that the business entity is separate from the member and should be treated as such. Second, you will also need to have some money put into the LLC or assign it some assets as a contribution so that the business has money to start out with. This also shows that the LLC is not just a “shell” but an entity with some substance. Normally this can be done by opening up a checking account and putting in $100 to $500. Banks, other lenders, and title companies will often require an Operating Agreement as a prerequisite to a loan. Third, Operating Agreements allow the original member to succession-plan for their eventual retirement from the LLC or the growth of the LLC to include more members. Agreements are not set in stone and can be amended fit the circumstances of the business over time.
Another consideration is the unique tax status of a single-member LLC. Typically, depending on elections made by the LLC, the IRS will treat it as either a corporation, partnership, or a disregarded entity. For federal tax purposes, a single-member LLC is by default a disregarded entity. This means that for most returns and reporting, the member will use his own social security number or EIN. Exceptions include if the LLC has employees and is subject to certain employment tax, excise tax requirements, or if an EIN is needed to open a bank account. An LLC may elect to be treated as a corporation and further elect to be treated as an S-corporation. This will change the manner in which the LLC’s taxes are filed. If organizing an LLC you should consult an attorney or accountant specializing in this area to determine which form will work best for you and your business.
Finally, a single-member LLC owner must ensure that personal finances stay separate from those of the LLC. One of the primary advantages of an LLC is the ability to avoid personal liability for the debts and liabilities of the LLC. However, if the LLC and its owner begin to mingle their funds and fail to keep their finances separate, a creditor may try to “pierce the veil,” or get around the LLC’s liability protection, and hold the individual member liable for the obligations of the LLC.
While a single-member LLC may be the obvious choice for those pursuing solo enterprises there are numerous considerations to take into account prior to filing the required documents. If you are unsure about whether it is the best model for your business, if you have a quality Operating Agreement, or whether you have elected the most advantageous tax classification, consult an attorney specializing in business matters. Further, depending on the nature of your LLC you may wish to consider insurance, so consult with your insurance agent.