Whether you’re a freelancer looking to grow a business or a current small business owner looking for legal protection, there are several different types of business structures to help you achieve your professional goals.
If you’re currently the sole owner of a business, there are two specific types of entities to look closely at: single-member LLCs and multi-member LLCs.
What is a single-member LLC? And what’s the difference between an LLC and a single-member LLC?
We’re here to help answer those questions and guide you into a new business structure that best fits your unique situation.
What is an LLC?
A limited liability company (LLC) is a business structure that ensures owners are not personally responsible for their business liabilities or debts.
This hybrid business entity combines elements of a corporation with those of a partnership and makes for a powerful business structure for many owners.
Owning and operating as an LLC allows entrepreneurs, small businesses, and owners to run their own business on their own terms. LLCs can also avoid double taxation and enjoy pass-through deductions and credits, all while taking advantage of legal protection and flexible profit sharing.
What is a Single-Member LLC?
A single-member LLC (SMLLC) is a limited liability company with only one owner/member who controls the entire business. The LLC is considered to be its own legal entity.
Whether you form an LLC with multiple members or a single-member LLC, both protect owners’ personal assets. By default, a single-member LLC is seen as a sole proprietor for federal tax purposes. Whereas an LLC is seen as a partnership by default.
It’s important to note that a single-member LLC is not the same as a sole proprietorship. Unlike a sole proprietorship, an SMLLC can bring on additional members at any time, choose how to file taxes, and be protected from liabilities.
How to Form a Single-Member LLC
The differences between an LLC and single-member LLC are minimal. This includes the steps on how to form each entity.
To form a single-member LLC, you must first choose a business name that is unique and unaccounted for within the state.
From there, you designate a registered agent who will act as the go-to person or entity for all legal documents. Then you file an article of organization with the state with the correct information and filing fees. Although not required, it’s also smart to create an operating agreement so that the rules are set for how you plan to run the LLC. As a single-member LLC this document will help if any legal situations arise. The operating agreement covers things like the members’ obligations and rights.
Once the documents are approved, you can then obtain necessary business permits and licenses, apply for a business bank account, and hire employees if necessary.
Benefits of a Single-Member LLC
Many business owners find the advantages often outweigh the risks when opting to form a single-member LLC. These attractive advantages include:
- Liability protection - any LLC is considered a separate business entity.
- Flexible tax structure - single-member LLC owners can elect to be taxed as an S corporation or a C corporation.
- Add new members at any time - you can add new members at any time, making it a multi-member LLC.
- You’re seen as a legitimate business - LLCs make your small business much more official in the eyes of the customer.
- Ability to pass ownership to others - single-member LLCs make it easy to pass ownership to members or loved ones.
How is a Single-Member LLC Taxed?
By default, single-member LLCs are taxed as a sole proprietorship. This means that even though your LLC is viewed as a separate entity, the owner and the business are the same when it comes to taxes. This is also called disregarded entity.
Single-member LLCs are subject to three different kinds of taxes as a business entity – federal income tax, self-employment tax, and state income tax. There is flexibility to elect to file as a corporation. As a corporation, the LLC will pay taxes on gross income and income tax on dividends.
As a disregarded entity, LLCs must file an Individual Income Tax Form, a Schedule C, Schedule E, and Schedule SE form.
If you hire employees for your single-member LLC, you will also have to pay the state employee taxes. These taxes cover things like worker compensation and unemployment.
Employer Identification Numbers
As a single-member LLC that chooses to be taxed as a corporation, or as an LLC with employees, an Employer Identification Numbers (EIN) is required. However, an EIN is not required for single-member LLCs with no employees. EINs are generally how the IRS tracks business, but with single-member LLCs, all profits and losses are recorded on the owner’s personal tax return using their social security number.
Outside of tax purposes, there are other reasons a single-member LLC may want to consider obtaining an EIN. For example, many business checking accounts require EINs. Plus, many companies require an EIN to process payments. Additionally, there are often state requirements for LLCs to have an EIN.
This is why working with an experienced business attorney is smart and would help you ensure complete compliance.