New Law Affects Limited Liability Companies

by Karen L. Brady

On May 25, 2007, President Bush signed into law a provision that allows married couples to choose “single member” tax treatment for a limited liability company, even though both spouses own membership interests. A single member LLC is eligible for tax treatment as a sole proprietorship.

Previously, this option was only available to couples who owned the LLC interests as community property. Couples in common law states, such as Colorado, did not clearly have that option. Without that option, an LLC owned by both spouses had to choose between being taxed as a partnership or taxed as a corporation.
The Small Business and Work Opportunity Tax Act of 2007 allows married couples to create a “qualified joint venture” provided that the spouses are the only owners, and both spouses materially participate in the business. If these criteria are met, the business can be taxed as a sole proprietorship, reporting income and loss on the Schedule C of the couple’s joint tax return. This is especially attractive to my clients who own income-producing real estate in an LLC. The LLC is an important component of their asset protection plan, minimizing their personal liability which might arise from ownership of the property. Now, it will be easier for them to manage the tax reporting for the LLC. The law is effective for tax years beginning 2007.

There are some problems, especially in Colorado, with the potential asset protection of single member limited liability companies. We’ve had at least one court decision indicating that the asset protection of an LLC may be diminished if there is a single owner. It’s not clear whether electing single member LLC treatment for tax purposes would weaken the asset protection of the LLC. However, as I always point out, having the argument of asset protection that the LLC provides is still better than owning the property outright, which provides no argument at all.