Limited liability companies (LLCs) are a business structure in the United States. In this business structure, the owners are not personally liable for the company's debts or liabilities. This provides personal protection for all members involved.
Limited liability companies are hybrid entities. They combine both characteristics of a corporation as well as those of a partnership or sole proprietorship. In some cases, there are multiple owners (known as members), but there are also LLCs that are formed with only one member, known as a single-member LLC.
What is a Single Member LLC?
Single member LLCs are the same as any other LLC. The only difference is that a single member LLC is a limited liability company that only has one member. Under current IRS rules, single member LLCs can elect to be treated as a corporation. Otherwise, they are automatically disregarded for Federal income tax purposes.
What are the Benefits of Starting a Single Member LLC?
There are several advantages of starting a single member LLC. They are easy to create and operate, especially compared to multi-member LLCs because there is only one member making all of the decisions.
Here are 5 additional benefits of forming a single member LLC.
- Potential tax savings: As compared to a sole-proprietorship, a single member LLC offers the opportunity to write off tax-deductible expenses and reduce tax liability.
- Limited liability protection: Single member LLCs are considered to be separate business entities from their owner. This means it is no longer attached nor identified with the owner for tax or liability purposes.
- Privacy: If formed anonymously, a single member LLC affords complete privacy protection.
- Recognized unique name: It is formed within a state and part of the approval process is a registration of the business name. This means that the name will then be unique to the LLC.
- More professional than a sole-proprietorship:Recognized as a legitimate business, as long as it holds the required LLC (or variation of) in its name.
How to Form a Single Member LLC
Single member LLCs are formed in the same way as any other LLC. The only difference in regards to the number of owners. When forming an LLC some states may require the articles of incorporation to mention how many members are within the LLC. Despite this, it will usually make the operating agreement simpler. Outside of these changes when forming a single member LLC, it is essentially the same process as a standard LLC.
How is a Single Member LLC Taxed?
By default, a single member LLC is taxed as a disregarded entity. There are choices though when it comes to taxation. Single member LLCs are able to elect either C-corp or S-Corp status through an additional filing with the IRS. The main difference in taxation is that single member LLCs cannot be taxed as a partnership because it would require more than one member.
What Taxes do Single Member LLCs Have to Pay?
Single member LLCs owners are responsible to pay 3 different types of taxes. It is important to remember that taxes vary state to state so make sure to check with your business attorney to ensure you don’t make any mistakes.
- Federal income tax: Because an LLC is not a taxing entity, the IRS has designated that single-member LLCs are taxed the same as sole proprietors. Single-member LLC will be required to report business income taxes on a Schedule C tax form. The net income from the business is then combined with any other income on the personal tax return of the owner.
- Self-employment tax: All single-member LLC owners are self-employed individuals. Despite this, they are not employees of their business. As self-employed individuals, single-member LLC owners must pay self-employment taxes. These taxes include both Social Security taxes as well as Medicare taxes. This will be based on the net income from the business.
State income tax: In general, state income taxes will change from state to state. Some states do not even have income taxes.
Employer Identification Numbers
An EIN is an employee identification number. This is similar to a social security number for your business. Single-member LLCs need an Employer ID Number, regardless of whether or not you have employees. This is because most banks require an EIN to open a business bank account. When a single member LLC is taxed as a disregarded entity, it should use its personal tax ID (social security number) rather than an EIN. This will be used when completing a W-9 form.
Is Forming an SMLLC Worth it?
If you run a small business with little liability and minimal profit, then you may not need to form a single member LLC. As a sole proprietor, forming a single member LLC can provide you with limited liability protection, and will make you appear as a legitimate business. You will also be able to obtain funding more easily and protect your personal assets. Forming a single member LLC is often worth it as long as you are running a legitimate business that is more than a side hustle.