When deciding to start a business, choosing the right business structure is an important first step. Setting up a single member LLC may be a great choice for you if you are a solo business owner who likes the idea of an LLC. Here, we’ll help you learn what you need to know about single member LLCs and if your business would benefit from this type of formation.
What Is a Single Member LLC?
A single member limited liability company (SMLLC) is a single-owner business structure that provides the owner tax benefits and limited personal liability protection from legal claims against the business. Simply put, it’s a limited liability company (LLC) with one owner.
A SMLLC is also known as a disregarded entity which means that because it does not operate as a corporation, it is not taxed as a separate entity for federal tax purposes. Instead, the owner of the SMLLC will report its earnings on his or her own personal tax return.
Many SMLLCs start out as sole proprietorships. If you are an independent contractor or owner of a small business, you are probably already considered a sole proprietorship. Sole proprietorships are business entities where the owner holds all assets and assumes all debts and liabilities from the business. This means the owner’s personal property is subject to lawsuits if the business can’t satisfy the debt.
You may, however, want to convert your business to a single member LLC.
Benefits of a SMLLC
As the owner of a SMLLC, you will be able to own property, open bank accounts, hire employees, and file/be subject to lawsuits, all on behalf of your company.
Forming a SMLLC can also provide you with greater protection if you have been operating as an independent contractor or sole proprietor. A SMLLC will offer tax flexibility and savings. Like sole proprietorships, single member LLCs have pass-through taxation. This means that profits made from the business are taxed at the owner’s personal income rate.
As mentioned above, a great reason to use an SMLLC business structure is that it offers limited liability protection. So, if your business is sued for any reason, your personal property is protected and only the business assets would be subject to the lawsuit. However, be mindful that LLC laws are regulated on a state-by-state basis and therefore the amount of protection from liability your SMLLC provides would depend on which state your business operates. Also, your limited liability does not cover any wrongdoings you commit during the course of business, including fraud, personally injuring someone, or failing to pay taxes.
Finally, it’s important to remember that if you must personally guarantee a bank loan, you will lose the protection of limited liability that a SMLLC provides. New companies and single owner companies often find themselves in this predicament when applying for a loan. Before making a personal guarantee, you may want to consider speaking to an attorney about the repercussions of doing so.
Single Member LLC Pros and Cons
- Liability protection. A SMLLC is treated as a separate business entity meaning that the owner and business keep all transactions separate
- Disregarded entity benefit. The SMLLC benefits from pass-through taxation which can reduce the owner’s tax liability since they will not have to pay federal taxes on the business
- Easier tax filing. Due to pass-through taxation, the owner only needs to file personal tax returns and does not have to worry about filing a separate tax return for the business
- Harder to set up than sole proprietorships. Where sole proprietorships form automatically, an owner must follow state law single member LLC filing requirements to form a SMLLC
- Risk of piercing the corporate veil. If the SMLLC is not carefully treated as a separate entity, creditors can argue that the owner’s personal property (as well as business property) is fair game for purposes of debt collection
- Possible reduced liability protection. Depending on where your business operates, your SMLLC may not be given the same liability protection as a regular LLC
How Do I Form a Single Member LLC?
To form a SMLLC, you will have to follow the rules for the state in which your business operates. Generally, you will need to complete the following steps:
Choose a Business Name
You should choose a business name that will reflect what your company is all about. You will need to do a search to make sure that the name is available. It would be a good idea to search in your state’s business name database as well as the federal trademark database.
Select a Registered Agent
Whether or not you need a registered agent will depend on where your business operates. The agent is responsible for receiving all notice of important documents like lawsuits or paperwork from your secretary of state’s office.
File Articles of Organization and Create an Operating Agreement
To register your SMLLC, you will need to file articles of organization with your secretary of state. The articles will lay out the name of your business, the purpose of your business, your name and address, and your responsibilities as owner.
Operating agreements are not always required but they are a good idea to detail the management of your SMLLC. The agreement should detail the structure of your business and lay out your responsibilities in the business.
Apply for an Employment Identification Number
You will need to get an employment identification number (EIN) to start your SMLLC. The EIN is a federal number assigned by the IRS which will identify your business for tax purposes.
Open a Business Bank Account
Having a separate bank account for your business helps keep your business finances separate from your personal accounts. This is crucial for liability protection and to ensure that your SMLLC remains a separate entity.
Remain in Compliance (pay annual fee and file annual report)
To keep your SMLLC operating smoothly, you will need to file an annual report. You can find more about the annual report on the secretary of state website for your state. The report keeps your SMLLC in good standing as you don’t want to risk your company losing its registration. Note that there is normally a fee required to file the report.
Frequently Asked Questions
Q: What is the Difference between a Single Member LLC and an LLC, Sole Proprietorship, and Corporation?
A: A SMLLC is the same as an LLC except that it only has one owner (member). Both business structures offer pass-through taxation and limited liability.
In a sole proprietorship, the government treats the business and owner as one in the same. Therefore, if the business is sued, the owner is liable not only professionally but also personally. This means your business assets and personal property are subject to the lawsuit. Alternatively, with a SMLLC, the owner’s personal property is not subject to a lawsuit since the business and owner are treated as separate entities.
In a corporation, the government treats the business as a tax classification. A corporation also has pass-through taxation but is structured more formally, including a board of directors, officers, and shareholders.
Q: Does a Single Member LLC Need an Employment Identification Number (EIN)?
A: It depends. If your SMLLC is required to file separate tax returns (because you have employees or you elected to be considered a corporation), you will need an EIN. You might also need an EIN if you open a business bank account and the bank requires it for your loan. However, if your SMLLC is treated as a sole proprietorship, you may not need an EIN.
Q: Can a SMLLC Owner Deduct Business Expenses on Tax Returns?
A: Yes, owners can deduct business expenses and healthcare on tax returns.
Q: How Do Taxes Work For a SMLLC?
A: If a SMLLC does not elect to be taxed as a corporation, it will be considered a disregarded entity. The owner will fill out a Form 1040 to report profits and losses and determine how much they need to pay in self-employment taxes.
Q: How Do I Terminate My SMLLC?
A: If you want to cease operating your SMLLC, you’ll need to dissolve or wind up your business. To do so, you will need to inform the secretary of state where your business operates and fill out formal paperwork, including the certificate of dissolution (or a similar form). This will ensure that you will no longer be responsible for paying fees, filing annual reports, or paying business taxes. You also must settle all outstanding debts and notify your creditors of your plans to dissolve your business. Putting all creditors on notice limits the amount of time they can collect on outstanding debts. Note that in some states, you must obtain a tax clearance or consent to dissolution from your state tax agency. The tax agency’s consent is required to show that your SMLLC has no outstanding tax obligations.
Other steps to consider to wind up your business include:
- If you have a business with customers, you should let the customers know the business is closing and collect on outstanding accounts, if necessary
- Close your business bank account and cancel commercial lease
- Cancel all certificates, permits, or licenses that were needed to operate your SMLLC if you will no longer need them
Ready to Start Your Single Member LLC?
If you are considering starting a business, it would be a good idea to speak with a lawyer about your business goals and find out if a single member LLC would work for you. You can get help and learn more here.