1. One-Member LLCs.
  1. In General.
  1. The various state LLCs acts, although not the product of a uniform limited liability act, contain many substantially similar provisions, particularly in areas affecting tax classification. All state LLC acts, for example, contain rules for continuity of the LLC upon the withdrawal of a member, so that while a technical dissolution may occur upon a member's withdrawal (to ensure a lack of continuation of life for federal income tax classification purposes), no actual termination and liquidation of the LLC will necessarily occur as a result of that dissolution. In addition, some states allow for the LLC to continue even if only one member remains and other LLC acts allow for a one-member LLC.
  1. The one-member LLC provides a pass-through alternative to the S corporation when there is only one equity owner. The single-member LLC is entitled to pass-through tax treatment, as is possible in a one-owner S corporation.
  1. A single-member LLC will not be classified as a partnership for federal income tax purposes. Instead, the single equity owner is taxed directly on the income and loss of the business, in effect ignoring the LLC for federal income tax purposes and taxing the single member directly on the business conducted through the LLC (unless an affirmative election has been made to tax the one-member LLC as a corporation).
  1. Advantage of One-Member LLC
  1. The chief advantage of the one-member LLC over the sole proprietorship, in the case of an individual, is the limited liability protection enjoyed by the individual owner. The advantage of the one-member LLC over the S corporation is somewhat less obvious and is more dependent on the particular circumstances of the taxpayer. As a general rule, the disadvantages typically associated with S corporations are less significant when there is only one shareholder. For example, although S corporations may only have 35 shareholders and no such limit is applicable to an LLC, the limitation on the number of shareholders of the S corporation is irrelevant in the one member context. Similarly, although an S corporation may only have one class of stock, while the LLC in contrast offers the opportunity to provide for special allocations of income and expense under § 704(b), the lack of flexibility in the capital structure of the S corporation generally is less significant in the context of the one-member organization.
  1. Certain advantages of the LLC over the S corporation remain, however, even in the context of the one-member organization. For example, the S corporation provisions prohibit stock ownership by certain types of individuals or entities. In general, only natural persons in certain qualified trusts and estates may own S corporation stock: corporations and partnerships may not be shareholders in an S corporation. In addition, a nonresident alien may not be a shareholder in an S corporation. None of these restrictions would apply in the context of the one-member LLC. Accordingly, the LLC might be an attractive limited liability vehicle for use by a nonresident alien or foreign corporation in conducting U.S. business and investment activities. Both an S corporation and an LLC, however, may be used as a holding company for subsidiary operating companies. Finally, the liquidation of a one-member LLC for state law purposes, and the distribution of its property to its single member, do not result in the recognition of gain if the one-member LLC is viewed for tax purposes as the agent or nominee of the single member. In contrast, the liquidation of the S corporation results in gain recognition if there is a distribution of appreciated property.
  1. The availability of the one-member LLC also proves beneficial when there are withdrawals from a multi-member LLC leaving only one member to carry on the business of the entity. Treating the single-member LLC as a flow-through entity for tax purposes eliminates the need to liquidate the entity for state law purposes and form a new limited liability entity (i.e., a corporation) to continue the business. The liquidation and incorporation of the business might have adverse practical consequences with respect to contracts to which the LLC is a party.
  1. Tax Classification of One-Member LLC.
  1. Reg. § 301.7701-3(b) provides that, unless the entity elects otherwise, a domestic entity is disregarded as an entity separate from its owner if it has a single owner. Thus, the single-member LLC is treated as the equivalent to a sole proprietorship and is not a partnership for federal income tax purposes.