A California single member LLC is a type of LLC with only one owner, protecting members from personal liability for the company's debts, and allowing tax benefits. The article explains how to form a single member LLC, its benefits over a sole proprietorship, and what an LLC is.
If you’re establishing a business in California, it’s important to choose what kind of entity you want your business to operate as. Some individual business owners choose to operate as sole proprietors because this structure requires no additional paperwork or setup; as soon as you start trading as an individual, you’re effectively a sole proprietor. However, sole proprietors don’t benefit from any protections or safeguards that more formal business structures offer.
Many business owners choose to operate as single member LLCs to minimize the amount of tax they owe, keep paperwork demands simple, and benefit from added protections where debts and liabilities are concerned. Let’s explore how CA single member LLCs work, what benefits they offer, and how to form a single member LLC in California.
What is an LLC?
An LLC is a limited liability company. Limited liability companies offer a combination of the benefits of partnerships or sole proprietorships and corporations. Many companies prefer to operate as LLCs because of the protections that they offer over less formal structures like sole proprietorships.
A California single-member LLC is taxed as a flow-through entity, which means that income flows through the business and is only taxed when you take money out of the company as an individual. At this point, it’s taxed as your own personal income. In this way, LLC owners avoid double taxation.
But, like corporations, LLCs also protect their members from being held personally liable for the debts and liabilities of the company. For example, if your company racks up lots of debts that it’s unable to pay, if it’s an LLC your own savings and capital are protected and cannot be used to pay off your company’s debts. This is not the case if you’re operating as a sole proprietor.
It’s possible to form an LLC as either a single member LLC or a multi-member LLC. Which type of LLC you choose to form depends on how many business owners want to be listed in the LLC formation documents and how you want to be taxed.
What is a single member LLC?
A single member LLC is a type of California limited liability company with only one owner. For this reason, single member LLCs are the most common alternative business entity for business owners currently operating as sole proprietors. In California, if you own your LLC with your spouse, you can elect for you and your spouse to be considered one owner and still run your business as a single member LLC.
Under the current IRS rules, single member LLCs are taxed automatically as disregarded entities, meaning they are disregarded for Federal income tax purposes. However, it’s possible to change your LLC’s tax status if you want to be taxed in a different way. For most small businesses, being taxed as a disregarded entity is both the simplest and the most cost-effective way to be taxed.
Single member LLC benefits
If you run a sole proprietorship already, you could consider switching to a CA single member LLC structure if you want to enjoy some of the benefits that this entity type offers. These benefits can reduce the amount of risk you take on as a business owner, improve your credibility in the eyes of investors and business partners, and ensure that your business is structured in the most tax-efficient way.
The most significant benefits of operating as a single member LLC rather than a sole proprietorship are:
- Tax: When you form a single member LLC in California, you can choose whether to be taxed as a sole proprietorship or as an S-Corp or C-Corp. This means that you can choose the most efficient form of taxation no matter how much your business grows.
- Liability: The members of a California LLC are protected from being held liable for the LLCs debts and liabilities, which means that you will never have to pay from your own savings to cover debts and liabilities that are in your business’s name.
- Privacy: You can choose to form a single member LLC anonymously if you want to keep your identity private. This is not an option for sole proprietors.
- Credibility: LLCs are seen as more credible and more professional than sole proprietorships. This is particularly important if you’re trying to secure funding from lenders and investors or form partnerships with other companies.
- Forming a California limited liability company is a simple and straightforward process and, for most business owners, it’s worth filing the paperwork to operate as an LLC rather than a sole proprietorship because of the benefits that this structure endows.
How to form a single member LLC
A California single member LLC is formed in much the same way as any other LLC, the only key difference being that a single member LLC has only one owner and this is reflected in the formation paperwork. Otherwise, it’s usually simpler to operate as a single member LLC than as a multi-member LLC because single member LLCs do not have to file annual K-1 forms.
Forming a California single member LLC is a relatively simple process. To form an LLC in California, you have to file an Articles of Organization, Form LLC-1, with the California Secretary of State. The filing fee for this document is $70, and the document must include the name of your LLC, which should be unique from other LLCs operating in California, the purpose of the LLC, and information on how the LLC will be managed. You will also need the name and California address of the LLC’s registered agent.
In California, all LLCs must have an agent for service of process, which is also called a registered agent in other states. This can be an individual or a company that agrees to accept legal paperwork and other documents on behalf of the LLC. An LLC cannot be its own agent for service of process, but you can pay a private company to act as your LLC’s agent for service of process.
The last thing that you should do is apply for an Employer Identification Number, which we’ll explain later. Establishing an LLC in California is a fairly easy process that can quickly afford your business multiple protections and increase its legitimacy when being considered for loans, funding, and partnerships with other companies.
How is a single member LLC taxed?
Single member LLCs are considered by default as disregarded entities by the IRS, which means that they are disregarded for Federal income tax purposes. By default, your LLC will be taxed like a sole proprietorship, which means that money passes straight through your LLC and is only taxed when you earn it as an individual. LLC owners in California may be subject to:
- State income tax
- Self-employment tax
- Franchise tax
In California, single member LLCs do not pay taxes at the state level. They are instead taxed on their owners’ personal income tax returns. The amount that you’ll pay as state income tax depends on how much you earn, with varying tax brackets ranging from 1% income tax to 12.3% income tax for higher earners.
As the owner of a single-member LLC, you are also considered self-employed for tax purposes, which means that you must also pay self-employment tax on any money that you take out of the company. Self-employment tax is currently set at 15.3%. In addition to this, all LLCs in California pay an annual Franchise Tax, which is $800 for most LLCs but higher than this for LLCs with incomes over $250,000.
What are Employer Identification Numbers?
After you form your California LLC, you may have to apply for an Employer Identification Number (EIN). If your LLC has employees or more than one member, applying for an EIN is a requirement; otherwise, you may choose to apply for one if you like.
Filing for an EIN is free of charge in California, and all you have to do to obtain an EIN is complete an online application on the IRS website by filing form SS-4. Even if you don’t require an EIN, it is beneficial to apply for one because EINs are required to open business bank accounts and fill in other important paperwork.
If you run a small business in California, you may want to consider restructuring your business as a California single member LLC. Operating as a single member LLC proffers a lot of benefits both to your company and to yourself, including improving the credibility of your business when you apply for loans and funding and protecting your personal assets and savings from the debts and liabilities of the business.