Role of a Sole Member of a Corporation
As the sole member of a corporation, you are responsible for every facet of the company. There are benefits and drawbacks of being a sole member, and it all depends on the intended goals and purpose of the company. Different types of structures call on different types of responsibilities from the single member. The two most common types of sole member corporations are the S corporation, and Limited Liability Companies (LLCs), and each has its own rules and benefits.
According to Walker Corporate Law Group, “A single member LLC is a new kind of animal, and until recently was not recognized in all 50 states.” Historically corporations were closely tied with governments and chartered for a specific purpose. Single member corporations were non-existent, and if an individual wanted to be the sole member of a company, his only option was to register a sole proprietorship, which is not a type of corporation.
An individual may start an S corporation, or a LLC. According to the IRS, most states in the United States recognize a single member LLC, and it is the member’s responsibility to choose how the IRS should treat it for tax purposes. The LLC can be treated either as a corporation, or as a disregarded entity. When the single member LLC is treated like a disregarded entity, the member is taxed as a sole proprietor for income taxes. In most states, the S corporation can also have a single shareholder, and this single member also serves as all the officers.
Being the sole member can ease the decision-making processes in the company, as well as simplify the formation and operation of the business. Single member LLCs provide flexibility in choosing how to be taxed every year, and it has fewer requirements than a C corporation or an S Corporation. Most of the benefit comes in the form of limited liability, which guards the sole member from debts and lawsuits of the company.
Depending whether the single member LLC has employees or not, the sole member of the corporation must closely watch the rules regarding tax reporting. In addition, the sole member must be sure that the state laws recognize the corporation, and she adheres to the local laws and regulations. Unlike multiple-member LLCs, courts may indeed place personal liability on the sole member by claiming that it is not an entity separate from the member for the purposes of protecting its assets.
According to the IRS, “there has been confusion regarding Single Member Limited Liability Companies in general and specifically, how they can report and pay employment taxes.” The Walker Corporate Law Group says that since the profit or loss can be reported on an individual’s schedule C as if it were a sole proprietorship, the single member LLC can save the member time and money associated with filing a separate income tax return for the corporation itself.