Broker Check

The Differences Between a One-Member or Multi-Member Limited Liability Company (LLC)

Howard Hook, CFP®, CPA, quoted in The Star Ledger's business/finance column, "Biz Brain" on November 25, 2013

Question: My wife and I plan to create a Limited Liability Company (LLC) in New Jersey for liability protection for the existing rental property we have, and for future ones we may buy. We did some investigation on this and know that you can have one, two, or more than two members in your LLC. For a one-member LLC, it will be treated as a Sole Proprietorship for federal tax purpose, i.e. pass-through taxation. We like that because of the simple way to file a tax return. But we are wondering if we have a one-member LLC, if the taxation of the LLC will go into our own tax return (joint return in our case), will it lose the sense of liability protection which is the original idea to create the LLC? — JY

Answer:  With an investment property, you’re smart to think about liability protection.

If you have a single member LLC, you are correct in saying the LLC will be treated as a Sole Proprietorship and go on Schedule C of your 1040 when you file your tax return, said Douglas Duerr, a certified financial planner and certified public accountant with U.S. Wealth Management in Montville. It gets a little more complicated if your LLC has two or more members. "For a multiple member LLC, a separate tax return would be required to be filed, and you most likely would receive a K1 for your individual tax filing," Duerr said.

Either way, you won’t lose the liability protection provided by an LLC. Whether it’s a single member LLC or a multiple, you keep the same advantages that come by placing the property inside the LLC, Duerr said. "Even though it will go on your personal return for tax filing, it is still a separate legal entity as long as it was properly formed and an EIN number was obtained," he said. An EIN stands for Employer Identification Number, and is used in lieu of a Social Security number for a business. "If you have both of you own the LLC, you will need to file a separate return since only a solo LLC can go on a Federal 1040," Duerr said.

There are a few cautions, though. Even if you have a one-member LLC and the tax reporting can go on your 1040, you should still treat everything else about the LLC separately because the LLC is a "separate and distinct legal entity," said Howard Hook, a certified financial planner and certified public accountant with EKS Associates in Princeton.

"A separate bank account should be opened in the name of the LLC. Formal books and records should be maintained for the LLC," he said. "Personal items should not be commingled with the business operations of the LLC, either."

Before you make the decision, you may want to speak to a tax advisor about the specifics of your situation.