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The 1999 amendment to the 1994 Tennessee Limited Liability Company Act (the "LLC Act"), repealed the provision that required that a Tennessee Limited Liability Company ("LLC") have two members (TENN. CODE ANN. § 48-203-103 (2006)). Accordingly, LLCs with one member may now be formed in Tennessee. The Tennessee Revised Limited Liability Company Act (the "Revised LLC Act"), which became effective on January 1, 2006 for all LLCs formed after that date, also permits formation of single-member LLCs. TENN. CODE ANN. § 48-249-501 (2006). By comparison, it is not possible to form a single-member partnership, since partnership law contemplates an agreement between two or more persons.
A single-member LLC is organized in Tennessee in the same manner as a multiple-member LLC and is governed by the same provisions of the LLC Act or the Revised LLC Act. Many of the governance provisions of the Acts, however, have limited applicability to a single-member entity. A single-member, member-managed LLC is not required to have an operating agreement, but an operating agreement is still advisable. Without an operating agreement, a single-member LLC might look much like a sole-proprietorship, which does not limit one's liability for business debts.
When an LLC has only one member, the fact that it is an LLC is "disregarded" or ignored for federal tax purposes, unless the member affirmatively elects corporate tax treatment. This means that while the LLC is still valid under state law – and thus, the member is afforded limited liability protection for the debts and liabilities of the company – it is treated for tax purposes as a sole proprietorship in that the member will report the receipts and disbursements of the LLC on the member's federal income tax return. No additional tax reporting is necessary at the federal level.
As with multiple-member LLCs, a single-member LLC is subject to the Tennessee franchise and excise taxes. Tennessee franchise and excise taxes are taxes levied for the privilege of doing business within the State. Excise taxes are imposed on the net earnings of an LLC for the tax year. Franchise taxes are based on the greater of net worth or the book value of real or tangible personal property owned or used at the end of the taxable year. If the sole member of the LLC is a corporation, however, the single-member LLC is disregarded as an entity separate from its member for Tennessee franchise and excise tax purposes (in the same manner that it is disregarded for federal income tax purposes), so long as it has not elected to be classified as a corporation.
For more information about this topic, please contact Tara Kraemer (tlk@mglaw.net) or one of our other Business Planning attorneys. |
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