Single Member LLCs: The Disregarded Entity

Since the adoption of the final “check-the-box” regulations in 1997, single member limited liability companies (“SMLLC” or “SMLLCs”) have become one of the fastest-growing and most popular forms of entity for doing business. Practitioners initially focused on using SMLLCs for sole proprietors who, prior to the adoption of Connecticut’s LLC Act, were unable to obtain liability protection without incurring the tax and administrative costs of incorporating. Recently, it has become clear to corporate tax advisors that the SMLLC can offer corporations several significant advantages that no prior entity was able to achieve.

When Connecticut adopted its Limited Liability Company Act in 1993, LLCs were required to have two or more members. The drafters chose not to authorize SMLLCs, in part, because of the substantial uncertainty that existed with respect to the tax classification of the SMLLC. The tax uncertainty was eliminated once the final check-the-box regulations were adopted in January, 1997. Under the final Treasury Regulations, the default tax treatment for a SMLLC is that of a disregarded entity. As such, the assets and income of the SMLLC are treated as the assets and income of the sole owner. Although the income tax treatment of a SMLLC for Connecticut tax purposes follows the federal tax treatment, the SMLLC is otherwise treated as a separate entity, thereby assuring the desired liability protection. Once the uncertainty as to the tax status of a SMLLC was removed, Connecticut’s LLC Act was amended to specifically allow SMLLCs.