If you are a small business owner currently operating your business as a sole proprietorship, or you’re thinking about opening a sole proprietorship, it is important to understand that if your business gets sued for something like a slip and fall in your store or a breach of contract, your personal assets can be reached to satisfy any judgments against you.

As a sole proprietor, you may be wondering if it’s possible to (1) protect your personal assets (cars, homes, bank accounts, etc.) from the debts and liabilities of your business, but also (2) have management flexibility and favorable tax treatment.

If these are your concerns, consider forming a single-member limited liability company (“SMLLC”). In California, the same statutory protections and advantages enjoyed by a multiple-member LLC apply to an SMLLC as well.

SMLLCs Offer Limited Liability Protection to Sole Proprietors

A business owner operating as a sole proprietorship can be personally liable for the debts and liabilities of the business. In contrast, a business owner that forms a single-member LLC (thereafter known as the “sole member” of the LLC) shields his or her personal assets from the debts and liabilities of the business because the SMLLC is a separate legal entity that is afforded the benefits of the law authorizing its formation and governing its operation. In California, the law is called the “Revised Uniform Limited Liability Company Act”, or “RULLCA”.

Are SMLLCs Real Entities?

In California (and most jurisdictions in the U.S.), SMLLCs are real, legitimate entities separate from their owners. In fact, RULLCA specifically says “[a]n operating agreement of a limited liability company having only one member shall not be unenforceable by reason of there being only one person who is a party to the operating agreement.” Cal. Corp. Code § 17701.02(s).

Tax & Management Flexibility of SMLLCs

A single member LLC also offers a similar level of flexibility as LLCs with two or more members.  Regarding income taxation, the SMLLC can affirmatively choose to be taxed as a corporation, or by default accept taxation as a “disregarded entity” where all income “passes through” directly to the owner for reporting on a personal income tax return. Likewise, a multiple-member LLC can receive “pass through” treatment like a partnership for income tax purposes.

Similarly, single-member LLCs enjoy the same level of management flexibility as other LLCs. The “single member LLC operating agreement” governs the manner in which a single-member LLC is operated, and can be written, within certain statutory guidelines, with whatever level of specificity the sole member desires. For instance, the single member LLC operating agreement may be written to allow distributions whenever the sole member deems them appropriate, or it may authorize the creation of officers such as President or Chief Executive Officer.

Setting up an SMLLC is Straightforward

The same ease with which multiple-member LLCs can be formed applies to single-member LLCs. Additionally, depending on the chosen financial institution, an SMLLC may need to obtain a federal EIN in order to open an LLC bank account. Otherwise, if a single-member LLC with no employees chooses to be treated as a disregarded entity, in most cases it will not need a separate EIN and would instead use its sole member’s Social Security number for tax identification purposes.