The California single member LLC is perhaps one of the more infuriating entities for people to understand. In this article, we take a look at the ownership issues associated with an LLC owned by a husband and wife.
If a husband and wife create an LLC, is it considered a single member LLC or a multi-member LLC? This simple question gives rise to a host of conflicting opinions on the web. Much of this is put down to the fact each state has its own laws governing the business entity. In truth, the real issue boils down to taxes.
The IRS is not known for being particularly reasonable. What seems logical to the IRS makes CPAs and business owners lose their hair. In the case of the LLC, however, the IRS has acted suspiciously helpful. A husband and wife who create an LLC can simply choose to be treated either as a single member LLC or multi-member LLC so long as they note as much in their operating agreement. You have to stick with the choice once it is made.
Alas, there is a third issue you need to keep in mind when making the selection, particularly in California. It has to do with asset protection.
The LLC is an odd little beast. Your ownership position in the company is split into two categories – an economic and participatory interest. When a person is sued and loses, a creditor can only go after the economic ownership interest. Practically speaking, this means the creditor gets any monetary distributions from the LLC, but has no say in the day-to-day operations.
This distinction may seem a small thing. It is not. Why? There are ways to produce taxable income in an LLC without distributing cash to the owners. In such a case, the creditor with the economic interest ends up with a tax bill even though they received no actual monetary distribution from the LLC. Not fun. This distinction creates leverage to force the creditor to settle for less than they would otherwise expect to receive.
Why does any of this matter? This scenario only plays out where there are two or more members of the LLC. If there is only a single member, the credit can take over the full ownership interest of the debtor. As a couple, choosing the double owner approach is the best choice.
Husband and wife joint-ownership of a business entity, any entity, is usually a tricky thing. I encourage you to consult with an attorney prior to making any decisions in this area.
Richard A. Chapo, Esq.