What Is a Single-Member LLC?

When starting a business, one of the first big decisions is choosing which type of business entity to form. One option is a limited liability company (LLC). If you form an LLC and you are the sole owner, which is called a member in the case of an LLC, you will have a single-member LLC.

Advantages of a Single-Member LLC

Limited Liability Protection

One of the most significant advantages of a Single-Member LLC (SMLLC) is the limited liability protection it offers. This means that the owner’s personal assets (such as a home, car, or personal savings) are generally protected from any debts or liabilities incurred by the business. In other words, if the business is sued or faces bankruptcy, the owner’s personal assets are not at risk.

Tax Benefits

An SMLLC provides several tax advantages. By default, it is treated as a “disregarded entity” for federal tax purposes, meaning that the business income is reported on the owner’s personal tax return (Form 1040, Schedule C). This can simplify tax filing and potentially lower tax rates. Additionally, SMLLCs can opt to be taxed as an S-Corp or C-Corp if that proves more beneficial. S-Corp taxation can allow owners to avoid self-employment taxes on a portion of their income.

Fewer Formalities and Paperwork

Compared to corporations, SMLLCs face fewer formalities and paperwork requirements. They are not required to hold annual meetings or maintain extensive records of corporate minutes. This reduction in administrative burden can save time and resources, allowing the owner to focus more on running the business.

Control and Flexibility

An SMLLC provides the owner with complete control over business decisions and operations. This level of control allows for greater flexibility in managing the business, making strategic decisions, and implementing growth plans without needing to consult with partners or a board of directors.

Disadvantages of a Single-Member LLC

Less Credibility and Perceived Professionalism

An SMLLC might be perceived as less credible or professional compared to a corporation or multi-member LLC. This perception can affect relationships with clients, vendors, and investors, who may view a single-member structure as less stable or less established.

Fewer Funding Options

SMLLCs may have fewer funding options available compared to other business structures. Investors typically prefer corporations or multi-member LLCs, which offer more formal structures and the potential for greater returns. As a result, SMLLCs may find it more challenging to attract investment capital or secure business loans.

Limited Life Span

An SMLLC may have a limited life span. In many states, the death or incapacity of the sole member can lead to the dissolution of the LLC, unless provisions are made in the operating agreement for succession. This limitation can pose challenges for long-term business planning and continuity.

Personal Liability Risks

While SMLLCs offer limited liability protection, there are scenarios where the owner can still be held personally liable. For example, if the owner personally guarantees a business loan or engages in fraudulent or illegal activities, personal assets may be at risk. Additionally, courts can “pierce the corporate veil” if it’s found that the LLC was not properly maintained as a separate entity.

How to Form a Single-Member LLC

Name and Registration Requirements

The first step in forming an SMLLC is choosing a unique name that complies with state regulations. The name must include “LLC” or “Limited Liability Company” to indicate its business structure. Once a name is chosen, it must be checked for availability and registered with the state.

Articles of Organization and Operating Agreement

To legally form an SMLLC, the owner must file Articles of Organization with the state’s business filing office (usually the Secretary of State). This document includes basic information about the business, such as its name, address, and the name of the registered agent. Additionally, while not always required by law, it is highly recommended to draft an Operating Agreement. This document outlines the business’s operating procedures and clarifies the owner’s rights and responsibilities.

Obtaining Necessary Licenses and Permits

Depending on the nature of the business and its location, the SMLLC may need to obtain various licenses and permits to operate legally. These can include local business licenses, state permits, and federal licenses specific to certain industries (e.g., health care, construction, alcohol sales). It’s important to research and comply with all relevant regulatory requirements.

Managing and Operating a Single-Member LLC

Record-Keeping and Accounting

Proper record-keeping and accounting are essential for managing an SMLLC. This includes maintaining accurate financial records, such as income and expense reports, bank statements, and receipts. Using accounting software can help streamline this process. Additionally, the owner should keep personal and business finances separate to maintain the LLC’s limited liability protection.

Tax Filing and Compliance

The owner of an SMLLC must ensure that all tax obligations are met. This includes filing federal, state, and local taxes as required. Since the SMLLC is a disregarded entity for federal tax purposes, business income and expenses are reported on the owner’s personal tax return. The owner may also need to pay self-employment taxes and make estimated tax payments throughout the year. Compliance with tax regulations is crucial to avoid penalties and legal issues.

Employee Hiring and Management

If the SMLLC plans to hire employees, it must comply with employment laws and regulations. This includes obtaining an Employer Identification Number (EIN) from the IRS, setting up payroll, withholding taxes, and providing necessary benefits. Additionally, the owner should establish clear employment policies and procedures to manage staff effectively.

Expansion and Growth Strategies

For an SMLLC to grow, the owner should develop and implement strategic plans for expansion. This can include marketing strategies, exploring new markets, diversifying products or services, and possibly converting to a multi-member LLC or corporation if needed. Continuous assessment of business performance and market conditions is vital for making informed decisions about growth and development.

An Alternative – Sole Proprietorship

If you’ve started your online business without forming a business entity, you’re, by default operating as a sole proprietorship, assuming you’re the only business owner. Sole proprietorships do not require registration with the state. 

In the case of a sole proprietorship, the business’s income passes through to the owner, just like in an LLC, and income is reported on the owner’s tax return on Schedule C. However, the key difference is that a sole proprietorship does not provide the owner with personal liability protection. 

If you’re a sole proprietor, you and the business are legally considered the same. This means that if your business has debt or is sued, you’re personally liable for the obligations of the business. This puts your assets, including your home, at risk. 

Comparing a single-member LLC and a Sole Proprietorship

Single-member LLCs are similar to sole proprietorships in many ways, but some key differences exist.

Entity Formation

As stated above, a sole proprietorship does not require registration with the state. To start a sole proprietorship, you simply need to start doing business. There is no cost. 

An LLC, on the other hand, requires filing articles of organization with your state. In addition, you’ll be required to pay a fee, which varies by state and runs from $40 to $500.

You’ll need to appoint a registered agent for your business and include their information on the articles of organization, along with the business name, address, and other information. A registered agent is a person or company authorized to accept and respond to official correspondence on behalf of your business, such as legal, tax, or financial documents. 

As the sole member of the LLC, you can choose to be your registered agent, appoint another person, such as an attorney, or select a registered agent service. 

Taxes

Single-member LLCs are, by default, taxed as sole proprietorships. However, both are pass-through entities, as mentioned above, so income from the business passes through to the member or owner to be reported on their tax return on Schedule C. 

However, LLCs are unique because they can elect to be taxed as a corporation if the members decide it makes financial sense. This is done by filing an election form with the IRS. In addition, you can choose to be taxed as a C-Corp or an S-Corp.

C-Corp status means income is taxed at the current rate for corporations (21% as of late 2022), which is lower than the usual individual taxpayer rate. But keep in mind that C-Corp shareholders – who are members in the case of an LLC – must also pay taxes on their distributions. This is called double taxation. 

However, members are subject to self-employment tax in an LLC that is taxed by default as a sole proprietorship or partnership. Once such LLC switches to being taxed as a corporation, self-employment taxes no longer apply. 

Similarly, self-employment taxes do not apply to members with S-Corp status, which is the main advantage of electing S-Corp status. 

With S-Corp status, members are generally paid as company employees, which means more accounting and payroll expenses. Therefore, S-Corp status is only beneficial when the self-employment tax savings exceed those additional expenses. 

Management

Single-member LLCs and sole proprietorship owners have complete control of their businesses and can manage them in any way they see fit. 

However, with a single-member LLC, the LLC is its entity and can enter contracts, take on debt, and purchase the property. This creates the personal liability protection: the LLC, not the member, is taken on by the obligations. 

With a sole proprietorship, you and the business are legally the same, so when you enter contracts or take on debt, the debt is yours as an individual, and you are personally liable. 

Personal Liability Protection

Again, personal liability protection is the key difference between a single-member LLC and a sole proprietorship. With an LLC, if the business cannot pay its debts or is sued, the member’s assets are not at risk.

In a sole proprietorship, if the business cannot pay obligations or is sued, the owner’s assets, including their home, are at risk since the business and the owner is legally the same.

Annual Requirements

A sole proprietorship does not have to file reports with the state. It may have business licenses to obtain and renew annually, but no documents regarding the business entity must be filed.

On the other hand, an LLC must file annual or biennial reports in most states. Those reports come with a fee, which varies by state. 

Does a Single Member LLC Need an EIN?

An LLC will need an EIN if it has any employees or if it will be required to file any of the excise tax forms listed below. Most new single-member LLCs classified as disregarded entities will need to obtain an EIN. An LLC applies for an EIN by filing Form SS-4, Application for Employer Identification Number.

What is the difference between a single-member LLC and a multi-member LLC?

The primary difference between a Single-Member LLC (SMLLC) and a Multi-Member LLC (MMLLC) lies in the number of owners:

• Single-Member LLC: This type of LLC has one owner (member). It offers the same limited liability protection and tax benefits as an MMLLC but is simpler in structure and management. For tax purposes, an SMLLC is typically considered a disregarded entity, meaning the business income is reported on the owner’s personal tax return.
• Multi-Member LLC: This type of LLC has two or more owners. MMLLCs have a more complex structure due to the involvement of multiple members. They can choose to be taxed as a partnership, where income is passed through to the members and reported on their individual tax returns, or as a corporation. MMLLCs often require more detailed operating agreements to outline the roles, responsibilities, and profit-sharing among members.

Can I be both the sole owner and the only employee of my single-member LLC?

Yes, you can be both the sole owner and the only employee of your Single-Member LLC. As the owner, you have the flexibility to hire yourself as an employee and pay yourself a salary. This can be beneficial for tax and retirement planning purposes. However, you must comply with all employment laws, including withholding payroll taxes and reporting income properly.

Do I need an operating agreement for my single-member LLC?

While an operating agreement is not legally required in most states for a Single-Member LLC, it is highly recommended. An operating agreement provides a formal document that outlines the business’s operational procedures, the owner’s rights and responsibilities, and how the LLC will be managed. It helps to reinforce the separation between personal and business assets, which is crucial for maintaining limited liability protection. Additionally, some banks and lenders may require an operating agreement to open a business bank account or approve a loan.

Can I convert my single-member LLC into a multi-member LLC later on?

Yes, you can convert your Single-Member LLC into a Multi-Member LLC at any time. This process typically involves adding one or more new members to the LLC and updating the Articles of Organization and Operating Agreement to reflect the changes. You will also need to obtain the consent of the new members and potentially amend any other legal documents, such as contracts and licenses, to include the new ownership structure. This conversion may also impact your tax status, so it’s advisable to consult with a tax professional or attorney to ensure compliance with all relevant regulations.