September 17, 2016

Which Is Better – Single-Member LLC Or Multi-Member LLC

My wife and I are considering starting a business in Arizona providing therapy services to children. We have chosen to form an LLC and are not sure whether to classify as multi-member or single member. We have read numerous letters and blogs indicating advantages and disadvantages for each and still remain undecided. What do you think is the best option for us?

– Ryan, Arizona

Answer

The first question you need to answer is whether you both want to be owners of the LLC, or just one.

Obviously, a single member LLC is the way to go if just one of you wants to own the LLC.

If you both own the LLC, then it’s not really “single member” anymore. However, as a husband and wife as to sole owners, you can elect disregarded entity status and avoid having to file Form 1065.

Instead, all your profits and losses would be recorded on your Schedule C of your 1040 (the “normal” tax return you file each year).

As far as whether you should both own shares in the LLC…

There are probably family law (e.g. in the event of divorce) considerations to who owns shares in the LLC, though it gets very complicated, and I’m not familiar with Arizona family. My understanding is that many western states are community property, which is different from what we have here in Missouri. Therefore, any family law issues would have to be addressed by an Arizona attorney.

On a general note, in terms of asset protection (after incorporating), your best bets are to:

1. Have adequate insurance;

2. Don’t be negligent.

The perception in the media is that any idiot plaintiff’s lawyer with a copy machine can win multimillion dollar verdicts on nothing more than a trip and fall.

The reality is far different.

You are more likely to be impoverished in business through employee fraud/embezzlement, lawsuits by your partners/investors, or lawsuit with suppliers and customers than to be bankrupted by a slip and fall plaintiff.

So, while incorporation makes logical sense, it’s important to purchase quality liability insurance. Then when there is a lawsuit you can hand the whole matter over to the insurance company’s lawyers.

Particularly because your business is dealing with children, having adequate insurance (at least $500,000 – $1,000,000) in case a child is injured is essential. Any plaintiff’s lawyer will take the insurance money over having to chase you personally into bankruptcy.

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