A limited liability company, or LLC, is a hybrid business structure that provides the personal liability protection of a corporation and the pass-through taxation of a partnership.
Like corporations, all types of LLCs are considered a separate entity and can have their own unique EIN (employer identification number) and bank account to conduct business. LLCs are easy to form, simple to maintain, and offer a flexible management structure where the business can be owned by one or more members.
This allows for LLCs to operate as one of the following:
- Single member LLC: Where you only have one member running the company.
- Member managed LLC: All members are treated as equals and share the same amount of responsibilities.
- Manager managed LLC: A board of managers is elected to oversee the direction and operation of the business.
What is the difference between an LLC and a single member LLC? Let’s take a look!
What is a Single Member LLC?
Single-member LLCs (SMLLC) are limited liability companies owned by one person. Unlike a sole proprietorship, single-member LLCs still offer personal liability protection and pass-through taxation. Single-member LLCs can also bring on additional members at any time.
How to Form a Single Member LLC
The process for forming a single-member LLC is very similar to the process of forming any type of LLC.
Choose a Name
The first step is to choose a business name that is unique in the state. You can find information on business names on the state agency’s website. And like all LLC types, the name must include some form of “LLC” at the end, whether it’s “Limited Liability Company,” “Limited Company,” “Ltd. Co,” or LLC.”
After choosing a name, you can officially name your business or reserve it for up to 120 days. Reservation of names requires Form 501 and a processing fee of approximately $50 depending on the state.
File an Articles of Organization
Your single-member LLC official begins by filing the Articles of Organization. This is done with the Secretary of State and requires details such as:
- Official business name
- Name and address of the registered agent
- Type of LLC - member-managed or manager-managed
- Name and address of each member/manager
- Name and address of the LLC’s organizer
Create an Operating Agreement
Many states do not require single-member LLCs to create an Operating Agreement, a legal document outlining how decisions are made within the LLC. However, having this document can be essential to your business. This is because the Operating Agreement ensures the business is being properly run to fulfill specific wishes of the business owner(s). It also protects members’ rights, duties, and obligations.
Obtain Federal Tax ID Number
This step is optional depending on how your single-member LLC is set up. If you do not have employees, do not pay business taxes, and are taxed as a sole proprietorship, then you don’t need a federal tax ID number. However, banks and lenders may require one for loans.
Benefits of a Single Member LLC
As with all business structures, there are pros and cons to a single-member LLC. Starting with the disadvantages, you have to know that you must maintain the corporate veil, you must submit compliance forms, and you have to file appropriate paperwork.
With that in mind, the pros often outweigh the cons. Here are a few key benefits of a single-member LLC:
Liability Protection: Single-member LLCs are considered a separate business entity from the owner. This status protects the owner's personal assets against company liabilities.
Flexible Taxation: Like all LLC types, single-member LLC owners have the flexibility to be taxed as a sole-proprietorship or a corporation (S corp or C corp).
Credibility: Make your business more credible, trustworthy, and official by adding LLC to your business name.
Freedom to Add Members: Single-member does mean one – but you can add members at any stage in your business.
How is a Single Member LLC Taxed?
Single-member LLCs are taxed on both a federal and state level.
By default, a single-member LLC is taxed as a disregarded entity. This means the owner is taxed through their own personal tax income. However, single-member LLCs have a choice when it comes to taxation. They can elect a corporation tax status. Regardless of the status you choose, single-member LLCs are required to pay three types of taxes:
Federal income tax: The IRS requires single-member LLCs to pay taxes through a Schedule C tax form – much like a sole proprietor.
Self-employment tax: All single-member LLC owners are self-employed individuals in the eyes of the IRS. As self-employed individuals, single-member LLC owners pay self-employment taxes which pay into Medicare and social security.
State income tax: State income taxes vary based on the state. Some states do not have income taxes.
Employer Identification Numbers
An Employer Identification Number (EIN) is not required for single-member LLCs unless employees are involved. Instead, all profits and losses are recorded on the owner’s personal tax return using their own Social Security number.
If a single-member LLC has employees, or chooses to be taxed as a corporation, then it must obtain an EIN. There is no cost to get this and it is easily obtained from the IRS. Additionally, having an EIN may help with loans and business bank accounts.