When starting a business in the United States you have a choice of a few different options. One of those options is a limited liability company. Limited liability companies (LLCs) are businesses that provide a structure where the owners are not personally liable for the debts or liabilities of the company.
LLCs combine aspects of a corporation as well as those of a partnership or sole proprietorship. Although you might think you need to have a large number of people to start a corporation, this is not the case. You can start an LLC with one single person. This is called a single-member LLC.
What is a Single-Member LLC?
Single-member LLCs are those which only have one member. In some states, a single-member LLC is not recognized in the same light as a standard LLC. In Texas, this is not the case. Despite this, under federal IRS rules, unless the single-member LLC elects taxation as a corporation, it is considered a disregarded entity for Federal income tax purposes.
How to Form a Single-Member LLC
If you want to form a single-member LLC in Texas, follow these steps to success.
Choose a Name
In order to form a single-member LLC, you essentially take the same route as any other LLC. The beginning stages include choosing a name. The name of your single-member LLC must include one of the following:
- Limited Liability Company
- Limited Company or Ltd. Co
- LLC or L.L.C.
The name must also be completely unique as compared to any other name that has already been filed with the Texas Secretary of State's database. By doing a business name search in the state of texas you can see if your potential name is available.
After you decide on the name you can either reserve it for up to 120 days or decide on the name officially. Should you want to reserve the name, you can file a Reservation of an Entity Name (Form 501) and pay a $40 processing fee.
File a Certificate of Formation
In Texas, you will start your single-member LLC by filing a Certificate of Formation. This is done with the Secretary of State and requires a few items:
- Official name of your LLC
- Name and address of the registered agent
- If the LLC will be member-managed or manager-managed
- Name and address of each manager or managing member
- Name and address of the LLC’s organizer
Create an Operating Agreement
Texas does not require single-member LLCs to create an operating agreement, but it is always a good idea. Especially when you have one member, it is essential to have an operating agreement in case a legal situation arises. This is because the operating agreement will cover members’ rights, duties, and obligations, but also includes the management structure. This might be the security for your limited liability.
Register With the Comptroller of Public Accounts
If you are selling goods and collecting sales tax, then you will need to register with the Texas Comptroller of Public Accounts (also known as the CPA). This is because Texas also imposes an annual franchise tax on most single-member LLCs. You can register online, by mail, or in person at a CPA field office.
What are the Benefits of Single-Member LLCs?
There are many advantages to creating a single-member LLC, here are the key benefits Texas business owners need to consider:
- Liability Protection: Single-member LLCs separate the business entity from the owner, protecting their personal assets against company liabilities.
- Legitimizes a Business: Make your business more official by stamping LLC next to your company's name.
- Freedom to Add Members: You don’t have to work alone forever, you can add members to a single-member LLC with ease.
- Flexible Taxation: Single-member LLC owners have the flexibility to be taxed as a sole-proprietorship or a corporation (S or C corp).
How is a Single-Member LLC Taxed?
Single-member LLCs are taxed on a federal and state level. By default, a single-member LLC is taxed as a disregarded entity. This means that the owner will be taxed through their own personal tax rate. Despite this, there are choices when it comes to taxation. single-member LLCs can elect tax status as a corporation, through an additional filing with the IRS.
Single-Member LLCs are required to pay three types of taxes:
- Federal income tax: Ann LLC is not a taxing entity, therefore the IRS requires a single-member LLC to pay taxes similar to a sole proprietor. This is done on a Schedule C tax form.
- Self-employment tax: All single-member LLC owners are considered to be self-employed individuals. Although this might seem as though these owners are employees of their business, they are not. As self-employed individuals, single-member LLC owners pay self-employment taxes which pay into social security and medicare.
- State income tax: In general, state income taxes will change from state to state. Some states, like Texas, do not have income taxes.
Employer Identification Numbers
When it comes to single-member LLCs, it is not required to get an Employer Identification Number (EIN) if it does not have employees. Instead, all profits and losses are recorded on the personal tax return of the owner, specifically using their own Social Security number.
If a single-member LLC has employees, or if the LLC chooses to be taxed as a corporation, then it must obtain an Employer Identification Number (EIN). This is easy to get and can help you to open a business account in the business's name. There is no cost to get this, and it is obtained from the IRS.