Two member LLC vs single member LLC?

6 Replies

was told that a two member LLC is more favorable for flipping activities for two reasons: 
1) much less likely to be audited vs a single member llc 2) much more difficult to pierce the corporate veil compared to a single member (many cases recently have not honored single member Llc's in terms of protecting and separating personal assets from company assets). Thoughts?

not an attorney or cpa here but I think it comes down too keeping your personal affairs separate from your business affairs. If what you are saying is true it sounds like single member LLC are more vulnerable due to the owner not doing a good job in keeping everything separate.

Have an operating agreement, by laws, minutes, ect.

Keep business and personal money completely separate.

Pay yourself a salary (if possible), bonuses, 401k, insurance, and anything typical companies do for their employees.

All your contracts should refer to the “company” and not his, hers, or anything that could be related to the single owner.

If you keep this separation clear and consistent it should be hard to pierce the veil and if you get audited (I believe some of it is random so you have no control to a point) then you should have all your ducks in a row. 

Multi member LLC’s generally are more difficult to pierce the corporate veil. You will have to file a separate tax return, however.

Hi @Ben C. Multi-member LLC is less likely to be audited than a single member LLC filing as a disregarded entity. If you elect to have the LLC to be treated as an S-Corp, the audit risk would be about same as multi-member LLC.

As for piercing the corporate veil, it depends how well you separate your personal affairs from business affairs. 

It’s not a scientific or researched comment for sure (state veil piercing laws vary quite a bit, and particularly with LLCs as they are relatively new entity form), but here’s a comments:

I literally have never heard of a case where the decisive factor in veil piercing is that its single member instead of multi member (studied mostly MN and DE law). Not once. The far more common argument is that there really wasn’t a separation of the business from the personal accounts. Since you’ll need an entity level accountant’s eyes most likely anyways, the filing of a return doesn’t seem to be (to my eyes) a hugely important factor one way or the other.

@Ben C.
1) It is true that there is a higher chance that the IRS will audit a SMLLC's schedule C/E over a multi-member LLC.
The reason for this is there is likely statistics that SMLLC's are less organized than multi-member LLC's.

With the IRS - you are guilty until proven innocent. Therefore - if you get audited and you are not organized - chances are that IRS is going to win the audit; a reason they target SMLLC's more.

2) In regards to rental investing LLC's; as long as you do the following - you have a smaller chance of having your corporate veil pierced.

  1. own the property in the LLC
  2. have the mortgage in the LLC
  3. have a separate bank account
  4. obtain insurance in the LLC
  5. have the tenants issue rent payments to the LLC

@Ben C.

Not an attorney or CPA, but did go through this decision making process recently. Depending on your state, multi member LLC's will also offer some advantages to give you charging order protection, meaning if you get sued personally (car accident, etc) then with a multi member llc they will have a tougher time getting to your assets held by the LLC. In a single member llc it's may be free game. Ultimately multi member will offer the best protection, but will cost more for the extra tax return.