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.

Read on to learn more about how a single-member LLC works.

What Is an LLC?

An LLC is a popular business structure for startup companies due to its many benefits. An LLC provides personal liability protection, for example, so that your assets are not at risk if your business is sued or cannot pay its debts. 

Also, an LLC is a “pass-through entity” in taxes, meaning that the LLC itself is not taxed. Instead, income passes through the company to the LLC owners or members, who report it on their tax returns. 

LLCs also offer flexibility in management, as there are few requirements regarding organizational structure. Again, an LLC with only one owner is a single-member LLC.

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. 

In Closing

An LLC offers many benefits, and if you are the sole owner, you’ll have complete control of your single-member LLC. Personal liability protection is the main reason many entrepreneurs choose an LLC, and you still benefit from pass-through taxation, just like a sole proprietorship. 

If you’re unsure whether a single-member LLC is right for you, consult your tax advisor and attorney.