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Does a Single Member LLC offer Liability Protection?

by | Mar 15, 2005 | Uncategorized

There is no reason to believe that as to liability arising from
within the LLC, such as a slip and fall on the premises being held,
that a single-member LLC will offer any significantly less protection
from liability to the member than a sole shareholder corporation
would to its shareholder.

In most states, the law relating to sole shareholder corporations is
relatively well-defined and is found in the corporate veil piercing
and alter ego cases. While the “unity of ownership” element is
obviously met in the case of a sole shareholder corporation or single-
member LLC, there are other criteria which usually must be met
(entity undercapitalized for its liabilities or used to perpetrate a
fraud, etc.), such that historically sole shareholder corporations
have actually stood up pretty well to prevent the liability from
flowing to the shareholder.

So, while the use of a single-member LLC is not ideal from a liability standpoint (although it is better than a sole proprietorship) it should afford the single member owners a significant layer of protection from claimants of the entity
in most cases.

But I’ll note that if dark clouds start appearing on the horizon, one
might to well to start trying to diversify the ownership. The
question “At what point do you test whether it is a sole shareholder
corporation?” is almost totally unsettled and seems to confound even
the few persons who profess to be experts on the topic (or at least
those who I have talked with about it). I presume that confusion
would apply to an SMLLC as well.