15 Jan What are single member LLCs used for?

Q. What are single member LLCs, and what are they good for, or not good for?
— Unsure

A. There are several different ways to form a business.

A Limited Liability Company, or LLC, is one of the options.

The term “liability” is what’s key here, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

He said if you form a business by yourself, that business is a Sole Proprietorship and you are a Sole Proprietor. If you form a business with someone else then, your business is a Partnership and you and the other owner(s) are Partners.

“The problem with being a Sole Proprietor or Partner is you have unlimited liability. If you are sued, you could lose your business and all your personal assets. You could lose your house,” Kiely said. “What’s worse is if you are a partner, you could lose everything because one of your partners goofed.”

So along came Limited Partnerships.

A Limited Partnership has to have at least one General Partner who has unlimited liability, Kiely said, and all the other partners can be Limited Partners who have limited liability.

“Limited Partnerships are used to attract funds from investors who do not work in the partnership,” he said. “In the 1960s and 1970s, tax shelters were Limited Partnerships.”

Limited Partnerships can’t help Sole Proprietors, Kiely said. So along came the Limited Liability Company or LLC, in the early 1990s.

There are one person LLCs and there are multi-person LLCs.

“With an LLC, for all owners or investors, liability is limited to the amount they have invested in the LLC,” Kiely said. “Investors’ personal assets are not at risk. Unlike a Limited Liability Partnership, there is no requirement that at least one investor have unlimited liability.”

You ask what a single member LLC is good for.

Let’s assume you are the owner of an auto repair shop. One of your employees didn’t properly tighten the bolts on a wheel when they replaced it. The wheel came off the car when it was going 65 miles per hour.

“You can imagine the lawsuit that would follow,” Kiely said. “If you were a Sole Proprietor, you could lose your home and your life savings. If you were an LLC, you could lose your shop.”

One question is frequently asked whether a person should put a rental property into an LLC.

“Having a rental inside an LLC would protect you in the event of a catastrophic event, such as if a tenant falls down the stairs and gets seriously injured. An LLC could protect you,” Kiely said.

He said if you want the protection, then everything pertaining to the rental has to be in the LLC’s name. This includes the deed, the mortgage, insurance and all utilities.

Email your questions to .

This story was originally published in January 2024.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.