When forming an entity to start a business or hold assets, most people wisely choose the LLC. After all, there are many benefits associated with that entity type. One of which is the LLC’s ownership flexibility. This is because they can either be a single-member LLC, or a multi-member LLC.
What’s The Difference?
So what’s the difference between the two?
A single-member LLC, at its very basic level, is an LLC with only one member. On the other hand, a multi-member LLC is an LLC with two or more members.
Which One Should You Use?
Certainly, there are pros and cons to using each entity. One noticeable pro of the single-member LLC is that you don’t have to deal with difficult business partners (like you may have to in a multi-member LLC). However, given recent trends, you may want to think twice before continuing as a single-member LLC.
Single-Member LLCs May Not Provide Great Asset Protection-With Exceptions
From an asset protection standpoint, the single-member LLC may not provide the protection that you need in all states. This is because there have been recent court cases that weaken their protection when the LLC member is sued personally. An example of a member being sued personally is when you into a car accident, and the car wreck victim sues you. And if that car wreck victim wins in court, they can foreclose on your interest in the single-member LLC. California and Utah allow for such actions. Conversely, Wyoming, Nevada, and Delaware provide charging order protection for even single-member LLCs.
The Charging Order Protection
The charging order is the most common collection method when an LLC owner is sued. So what is it? A charging order is a lien on the distributions from single-member or multi-member LLCs. This means that the only way the car wreck victim can collect from the LLC is when you make distributions out of it. But here’s the key: if you don’t make distributions, the car wreck victim doesn’t collect anything from the LLC.
In a stronger asset protection state, this is the only way that car wreck victim can collect from your membership interest. But if you have a single-member LLC in a weaker state, the victim may have other remedies against your single-member LLC.
Foreclosure
The first remedy they may have is a foreclosure. This is where the court orders you to sell your single-member LLC interest. When this happens, you lose the business or real estate entirely.
Reverse Veil Piercing
The second possible remedy the victim has is through a reverse veil piercing. Reverse veil piercing is a remedy that allows an LLC member’s creditors to reach inside the LLC to satisfy the creditor’s judgment against the member. In practice, this would permit the car wreck victim to reach inside your single-member LLC to satisfy their personal judgment against you.
Are These Different For Single-Member LLCs?
Now, undergoing a business foreclosure or a reverse veil piercing is not a pleasant thought. And they are much more likely to occur with single-member LLCs. The reason: with a single-member LLC, there is no innocent member to protect. This is because if the single-member LLC is sold, or its assets are seized, there is no innocent second member who is harmed by those actions.
Conclusion
Deciding between a single-member LLC and a multi-member LLC is an important consideration. Forming a single-member LLC may be the way to proceed in strong single-member LLC states like Wyoming, Nevada, and Delaware. But given its weaker asset protection benefits in other states, it may make sense to opt for a multi-member LLC in many situations.
And if you need help forming your LLC, we here at Corporate Direct would be happy to assist. You can schedule a free 15-minute consultation with one of our incorporating specialists by clicking the link here: https://corporatedirect.com/schedule/
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