Exploring the Basics: What is a Single Member LLC?
By Bazal Razzaq
Updated: July 03, 2023
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- What is a Single Member LLC?
- Single Member LLCs vs Sole Proprietorship: What’s The Difference?
- What are the benefits of a Single Member LLC?
- What are the drawbacks of a Single Member LLC?
- How To Form A Single Member LLC?
- Things To Take Care of When Operating A Single Member LLC
- How To Pay Yourself As A Single Member LLC?
- Frequently Asked Questions (FAQs)
- What is an LLC?
- How to change your LLC name in 2023?
- How to set up an LLC as a Non-US resident
- What Is A Foreign LLC?
- Mastering the Art of Maintenance: Things To Do After Setting Up An LLC
- The Power of Partnership: Unleashing The Potential of A Multi Member LLC
- C Corp vs LLC – Which Business Structure is Right for You?
- Which is the best state to form an LLC in?
- Unlocking the Benefits of an LLC (Limited Liability Company)
- A Guide to Business License: Everything you need to know
- Operating Agreement 101: A Key To A Successful LLC
- One LLC, Multiple Streams of Income: can you have multiple businesses under one LLC?
- Articles of Organization Made Easy: Everything You Need to Know
- What Is A LLC Annual Report: A Comprehensive Guide for Business Owners
- Exploring Eligibility: Who Can Be LLC Members?
- What Is A Domestic Limited Liability Company?
- What is An EIN, and Do You Need One?
- What Is a Registered Agent, and Why Does Your Business Need One?
- What is a Series LLC?
- How to start a business with no money in 6 steps
- Member Managed vs Manager Managed LLC – Which Structure Fits Your Business?
So you’ve finally decided to open your own business. Cheers! Now, as a business owner, there are multiple things you need to take care of. From the products and services you’re offering to the business structure you would best be comfortable with. It’s a long, long road also. If you’re an entrepreneur planning to go solo or a “solopreneur,” you must choose between choosing an LLC as your business setup or sticking with a basic sole proprietorship program.
If you ask us, our vote goes to forming an LLC. An LLC specially curated and tailor-made for your solo entrepreneurial journey. Yes, the safe and reliable makeup of an LLC has given rise to forming something known as a “single member LLC”. As the name suggests, SMLLCs have a separate legal framework that allows single businesses to benefit from limited liability protection, tax benefits, and multiple funding options.
For many solo, small business owners, SMLLC is a favored choice, and for a good reason. Why? Here’s a detailed guide explaining just that.
What is a Single Member LLC?
An SMLLC is a Limited Liability Company structure with one voting member, i.e., the owner. This member has complete control over their business. It functions just as an LLC would. LLCs, in general, are legal bodies that offer personal liability protection to their members, shielding their assets, such as cars, bank accounts, and homes, from debts, liabilities, and legal claims against their business.
For the Internal Revenue System (IRS), an SMLLC is a “disregarded entity,” which means the LLC and the owner are distinct for all legal purposes. Small business owners often prefer SMLLCs (yes, the short form) because they offer the same benefits and ease as an S- corporation or a multi member LLC.
SMLLCs are easier to set up than other company structures, have a low business expense, and have a sorted tax structure. Such advantages make them a popular choice amongst small business owners because they offer liability protection without the headache of complex formalities and regulations that usually come with forming a business.
They don’t have to pay corporate taxes as the profits and gains pass right through to the owner, and the IRS then collects the taxes from their tax returns.
There are usually two kinds of SMLLCs:
- An SMLLC administered by members
In a member managed single member LLC, the owner runs the business, makes all decisions, and oversees daily operations. States assume that an SMLLC is member-managed unless the formation documents state otherwise.
- An SMLLC administered by a manager.
With a single member LLC managed by a manager, the owner chooses a manager to oversee day-to-day activities.
The owner will continue to have the final say in managing the LLC, adopting a quiet partner strategy and refraining from being involved in the day-to-day operations of the LLC.
Single Member LLCs vs Sole Proprietorship: What's The Difference?
For someone who wishes to run their own business, continuing as a sole proprietorship may seem simpler than becoming an SMLLC. We understand that sole proprietorship is the most basic of the existing business structures, requiring no formal and complex actions. Still, various advantages to being set up as an SMLLC make the transition worth it.
Even though the two business structures seem similar on the surface level, there are key differences in how they are set up, taxed, and protected in case of a lawsuit.
- Formation: An SMLLC needs to create an Operating Agreement and typically file Articles of Organization with the state as part of the formation procedure. Some states require publishing formalities like getting company licenses and similar processes. On the other hand, you can form a sole proprietorship immediately when an individual begins doing business without official registration formalities. Yet, depending on the location and type of the firm, the owner might still be required to acquire the necessary licenses or licenses.
While sole proprietorships are simpler to form and relatively smooth and simple to run, they don’t offer as much protection and security as an LLC. In comparison, SMLLCs are considered a lot more professional than sole proprietorships.
SMLLCs are an attractive option for starting a business because they’re easy to form. The only thing to note is that all the rules and regulations vary from state to state. You can look for your particular state’s needs and requirements and general information on SMLLC formation by IRS here.
You should still register for an Employment Identification Number, or EIN, whether you’re a sole proprietor or the boss of a one-member LLC. Without an EIN, you would have to provide your Social Security number to many people, increasing your risk of identity theft. Federal tax identification numbers, often known as EINs, are created by the IRS and are used to identify corporate companies.
For business licensing, permitting, and creating a business bank account, all business owners need to apply for an EIN. In addition, you’ll substitute it for your Social Security number on tax documents like W9s.
- Taxation: Both SMLLCs and sole proprietorships are similar in terms of taxation. They are both pass-through entities, which means the business is not liable to pay income taxes. They both fill out Form 1040, the document to report profits and losses, file income tax returns, and calculate the self-employment taxes they must pay, including Social Security and Medicare taxes.
Although, an LLC can elect to function as an S- corporation or a C- corporation for taxation purposes. These are both two types of corporations with distinct tax structures.
- Liability: The benefit of a single-member LLC over a sole proprietorship is that the owner’s liability may be limited to the amount of their investment in the business. In contrast, sole proprietor exposes their assets to danger each time they do business.
Confused? As a sole proprietor, you could lose your business assets and private property if your business faces any legal challenges or a lawsuit. If someone sues you personally, they can also claim your business assets. The law recognizes the owner and the business as separate entities, which is why this can occur. Whatever happens to one side of the business affects the other.
As an SMLLC, your assets remain protected against any legal claims related to your business and vice versa.
What are the benefits of a Single Member LLC:
An SMLLC offers many benefits to its members/owners. Here are some key advantages:
- Limited Liability Protection: The absolute favorite of every LLC owner. One of the major advantages of an SMLLC is its limited liability protection. As a business owner, your personal assets remain protected from various business liabilities like debts, obligations, and financial problems. If your LLC faces legal issues or debt, your personal belongings, like your home or car, are not typically at risk.
- Simplicity and Flexibility: As you may already know, running a single member LLC is generally simpler and more flexible than other business structures. You have more control and authority over decision-making and operations without the extensive documentation or formalities required by larger companies.
- Tax Flexibility: SMLLCs enjoy flexibility in terms of taxation. By default, the LLC is considered a “disregarded entity” for tax purposes, meaning the profits and losses of the business will get reported on your personal tax return. However, you also have the option to choose to be taxed as a corporation if it is more advantageous for your specific situation.
What are the drawbacks of a Single Member LLC?
While there are a lot of benefits to forming an SMLLC, there are also a few drawbacks to consider, like,
- Limited Legal Protection: While an SMLLC offers personal liability protection, this protection is often challenged in certain situations. Mixing personal and business finances or failing to maintain proper legal and financial separation between yourself and the LLC may weaken your liability protection.
- Difficulty in Raising Capital: As compared to other structures like corporations, single member LLCs may face challenges when raising capital for the expansion and growth of their business. Investors and lenders may be less inclined to provide funding since a single individual is responsible for the ownership and management of the company.
- Self-Employment Taxes: As the sole owner of an SMLLC, you are generally responsible for paying self-employment taxes, including the employer and employee portions of Social Security and Medicare taxes. This arrangement can result in a higher tax burden than other business structures.
It’s important to remember that the benefits and drawbacks can vary depending on individual circumstances and the specific nature of your business. We recommend consulting with a legal or tax professional to fully understand the implications of establishing an SMLLC.
How To Form A Single Member LLC?
You must take the following steps to set up an SMLLC or convert your sole proprietorship into an SMLLC:
- Register your business name.
- Apply for an Employer Identification Number (EIN)
- Choose a registered agent who will be the recipient of any tax communications.
- Submit the Articles of Incorporation document to your Secretary of State. Each state has different requirements for filing fees, business licenses, and the information you must submit.
- Open a professional bank account for your LLC.
- Draft an Operating Agreement to avoid any future fights, disagreements, and misunderstandings between LLC members/owners.
- Follow your state’s regulations on compliance, such as completing operating agreements, paying taxes, and filing yearly reports. (State-by-state requirements differ.)
- If you’re an employer, follow and take note of all hiring regulations.
Things To Take Care of When Operating A Single Member LLC
As the owner of an SMLLC, there are a few things to note when operating the company,
- Sign all important and official business documents as your LLC’s representative.
- Maintain excellent and accurate, up-to-date records of all business operations, including company decisions, meeting minutes, updates on membership roles, and other resolutions.
- When filing a tax return as a disregarded entity, you must mention your LLC’s tax identification number on Schedule C.
- When you form your LLC, you can choose whether and how it’ll be taxed like a corporation. To do this, you must fill out a form called IRS Form 8832, called the “Entity Classification Election.” This form allows you to elect corporate tax treatment for your LLC.
- To calculate your profits and losses from all your business activities, you can again use Schedule C of Form 1040. Then, transfer the line 31 of Schedule C to the correct line of Form 1040. Please remember that the process can vary depending on the specific Form 1040 you’re using.
How To Pay Yourself As A Single Member LLC?
Suppose you pay personal expenses straight from your business income as an SMLLC. In that case, you are at risk of breaching the corporate veil. You must pay yourself through distributions to preserve liability protection and to keep your bookkeeping and finances orderly.
Owners of single-member LLCs must write a check and enter it as an “owner’s draw” on the books. As you are not an employee, payroll taxes do not apply to this draw. Nonetheless, you’ll need to pay self-employment tax to the IRS if you intend to file your taxes as a sole proprietorship.
We understand that an SMLLC requires a few extra steps to establish and run compared to sole proprietorships. But the perks are worth it. The LLC formation structure enables small businesses like yours to obtain a corporation’s structure and benefits while avoiding the hefty charges that come with it.
It was created for aspiring business owners like you to chase your business ambitions. While an SMLLC may be time-consuming, it could be that one leap toward success for all your entrepreneurial ventures.
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Frequently Asked Questions (FAQs)
An SMLLC is a type of corporate entity owned and operated by a single person, the sole member. It is a limited liability company that shields the owner from liability while allowing for flexibility in management and taxation.
They are not the same, despite their similarities. The key distinction is that a sole proprietorship does not provide limited liability protection for the owner, whereas a single-member LLC does.
Single-member LLCs provide several advantages, but it’s necessary to be aware of some drawbacks as well:
- No protection from personal liability: A single member LLC can provide varying levels of protection despite LLCs typically being formed to offer personal liability protection for their members.
- Taxation for self-employment: A single member LLC company form is not treated as a separate entity for taxation reasons, unlike corporations.
- Short lifetime: A single member LLC may have a finite lifespan in some states, such as a five-year expiration period.