I’m running my LLC in Chicago, Illinois, as a sole proprietor. I’m not getting the liability and asset protection as a sole proprietor of my LLC. I’m considering getting a partner. What forms do I need to file?
– Gustavo Santana
1. Yes, in many states a single-member LLC would have less protection from personal creditors for its members than a multi-member LLC. However, Illinois, to the best of my knowledge, hasn’t really settled on how they are going to treat single vs. multi-member LLCs in many respects. This is a relatively new area of the law.
2. True, to get the fullest limited liability protection from personal creditors in all states, an LLC should have at least two members. However, don’t add your simpleton cousin to the LLC as a sham. The second owner can be a spouse or even that simpleton cousin, provided they are treated as a legitimate co-owner of the LLC.
If the courts smell a sham, they will likely treat the LLC as a single-member LLC. To avoid this, the co-owner must pay fair market value for the interest acquired and otherwise be treated as a “real” LLC member, i.e., they must receive financial statements, participate in decision-making, and receive a share of the LLC profits equal to the membership percentage owned.
3. Even if you get the other member, you could have a court battle that doesn’t apply Illinois law if you were doing business or own property in a state that has laws less friendly to LLCs than your home state. Where you file is not the end of the story when it comes to personal liability and asset protection in connection with your LLC. Also, the protections state LLC laws provide to LLCs may be ignored by the federal bankruptcy courts.
I don’t practice in Illinois, but they seem to require this form LLC-5.25 when adding a partner.
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