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.
Exploring The Single Member LLC
An SMLLC, as mentioned before, is just an LLC with a single person at its head. However, unlike a corporation, an SMLLC isn't taxed. The Balance SMB notes that LLCs, in general, don't pay federal income tax since they are seen as non-taxable entities. An owner of an SMLLC needs to file their taxes independently of the corporation. However, the SMLLC offers some unique benefits to its members, including:
- A professional appearance: An SMLLC is far more professional than a sole proprietorship. Partners are more willing to do business with a company they see as "legitimate."
- Privacy: Filing an SMLLC can be done both publicly and privately. A privately filed LLC doesn't have its address and the director's name in the public domain, leading to increased privacy.
- Protections: As mentioned before, LLCs serve as a buffer to protect an owner's assets from litigation. The company's assets are separate from the owner's.
- Tax Savings: In some jurisdictions, SMLLCs are likely to pay fewer taxes at the state level than sole proprietorships.
- Options For Raising Capital: Just because a company is registered as an SMLLC doesn't mean it needs to remain that way. The business may offer additional memberships to others as a means of raising capital.
The Single Member LLC can be highly beneficial for a business owner. Professionals who currently operate as sole proprietors may run afoul of disgruntled clients that could cause loads of legal troubles for them. While settlements may happen that deal with the brunt of these legal issues, the fallout could impact the sole proprietor's assets directly, crippling their business. SMLLC's are a perfect way to protect assets and having the legitimacy of a registered company for just a bit of an extra cost. The savings could be pretty substantial if the business ever runs into legal trouble with a client.
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.
Forming a Single Member LLC
Filing for an SMLLC is similar to incorporating a standard LLC. The procedure to file for an SMLLC is as follows:
- Find a name and conduct a search: You will need a unique name for your LLC within the state. When you come up with one, you'll need to perform a search to ensure someone else isn't using that same business name within the jurisdiction. This search helps to avoid complications later on.
- Prepare the Articles of Organization and LLC Operating Agreement: These documents vary by state and apply to how the business is supposed to be run. Single-member LLCs have a separate operating agreement covering how the company admits new members and the standard operating procedure, including how the business is to be closed.
- Submit the Documents: Once the documents are completed and signed, they can be filed with the state for processing.
- Obtain an Employer Identification Number (EIN): An EIN serves a similar purpose as your Social Security Number when it comes to filing taxes. The IRS usually relies on your SSN or the SMLLC's EIN to calculate taxation. Generally speaking, when you pay taxes, you would use your own TIN/WIN, but not the EIN of the LLC. In 2007, the IRS required LLCs to pay certain excise taxes, for which they required an EIN. Employment tax may fall under this category as well, meaning that owners should have an EIN registered for the business.
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.
Is A Single Member LLC Worth It?
In general, a single-member LLC offers options for professionals and business owners alike. An LLC is protected from taxation, and owners only need to pay taxes once on their own earnings. In some states, such as Wisconsin and Florida, businesses don't need to pay any taxes at the state level, allowing individuals to retain more of the business's earnings as income. Clever management of revenue can even help defer the taxes between windows, allowing lower tax rates over a year's earnings.
LLCs have a long history within the US. Many business owners opt for this type of structure because of the protections it offers to their personal assets. You don't even need to reside within a state to have a business registered there in some cases. You can just as easily have a registered agent with a remote registration through a respected third party. These options present possibilities not limited by geographical constraints. If you're a business owner, you should be considering investing in registering as an SMLLC because the benefits far outweigh the downsides.