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A single-member LLC (SMLLC) is one of the most viable options for entrepreneurs looking to kickstart their business careers.
The purpose of this article is to cast a light onto the inner workings of SMLLCs, explaining how taxation works and comparing and contrasting the business structure to sole proprietorships and multi-member LLCs (MMLLCs).
To begin, let’s start with a definition of what an SMLLC is.
Key Takeaways
- Single-member LLCs are a versatile business structure where the business owner has executive voting rights while enjoying a far greater degree of protection compared to Sole Proprietorships.
- Taxes are incredibly straightforward with single-member LLCs as the IRS will consider you and the business as one and the same. With taxes, you can follow either the S-corp or C-corp scheme.
- A few advantages of single-member LLCs include protection from liability, flexibility, and multiple tax options. However, downsides to watch out for include the cost, paperwork, and mixing of your business and personal assets.
- Compared to sole proprietorships, single-member LLCs enjoy simple taxation schemes, straightforward procedures, and increased credibility when conducting official transactions.
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What is a Single-Member LLC?
A single-member LLC (also known as SMLLC for short) is a single member Limited Liability Company.
The sole member of an SMLLC is the owner of the business and therefore has executive voting rights on the way the business is operated.
The limited liability aspect of this type of business structure provides protection for the owner’s personal assets.
If for any reason your company is sued or you can’t pay your debts, the structure of an SMLLC provides a ‘corporate veil’ to separate your business assets and personal assets.
The owner of an SMLLC can be an individual or a pre-existing company such as an LLC.
Single-Member LLC Taxes
For tax purposes, you and your single-member LLC are considered the same entity – much like a sole proprietorship.
The reason for this is the IRS doesn’t have a dedicated tax classification for LLCs, so will just tax your company based on the number of members it has.
However, this is just the default tax classification. There are two ways SMLLC can opt to be treated as a corporation for tax reasons, with both having different tax structures.
SMLLCs seeking to be treated as a corporation for tax purposes have two options: being taxed as either an S-corp or a C-corp.
Related reading: How to file taxes for an LLC
S-corp
Members are exempt from paying self-employment tax. Instead, they pay employment taxes on a salary they set aside for themselves.
Profit on top of this salary isn’t subject to employment tax; however, income tax will need to be paid for this portion of income.
C-corp
All profit made by the SMLLC is subject to corporation tax. On top of this, profit reallocation to the sole member is also subject to personal income tax.
This way, owners of SMLLCs operating under a C-corp structure don’t pay self-employment tax but do pay payroll tax on their salary or wages.
Operating Agreement for a Single-Member LLC
SMLLC operating agreements dictate how your business will be operated, how you plan to pay yourself, and what will happen should the SMLLC dissolve.
Even if an operating agreement is not required in the state where your business operates, it is still a good idea to have one as it is a key document investors use in order to decide whether they want to work with you or not.
Templates are available here:
Pros and Cons
| Pros | Cons |
|---|---|
| Personal liability protection via the ‘Corporate Veil’ | Mixing business and personal assets compromises the effectiveness of the corporate veil in protecting the owner of an SMLLC |
| Flexibility to add members or transfer ownership to others | Paperwork, paperwork, paperwork – In the formation of SMLLCs and regular compliance forms to confirm the legal stewardship of the company |
| Multiple tax options – as discussed, SMLLCs can pay tax either as a sole proprietorship or using an S-corp or C-corp structure | Cost – compared to a sole proprietorship company an SMLLC necessitates a lot more costs |
Single-Member LLC vs. Sole Proprietorship
A sole proprietorship is the most basic business structure.
Technically, nothing needs to be done in order to form one if you are forming it under your own name. Therefore, no costs are involved.
If you want to operate a sole proprietorship under a different name, you need to register this with the relevant authorities where you are situated.
What follows is a table explaining the pros and cons of sole proprietorship companies so readers can compare and contrast with the pros and cons of SMLLCs:
| Pros | Cons |
|---|---|
| Straightforward. If you are working for yourself independently, you have already established a sole proprietorship | Less credibility than an LLC or SMLLC, which may result in the decreased likelihood of attaining financial backing from banks or other entities i.e. investor |
| Simple taxation, considering a sole proprietorship business and its owner are considered one and the same for tax purposes | Lack of protection – no ‘corporate veil’ to protect personal assets |
| No formal registration process or associated fees | You take on all of the responsibilities. Without partnership or investment, executive decisions and finance generation all lie on your shoulders |
As was discussed above, taxation is generally the same between sole proprietorships and SMLLCs, save for a few caveats.
And while they are more expensive to establish, SMLLCs ultimately provide the owner with greater protection.
If you are a budding entrepreneur looking to start your very first business, the simplicity of a sole proprietorship could be an enticing prospect.
However, if you are looking for credibility and the opportunity to take your business to the next level with financial backing, an SMLLC may be the shrewder option.
Single-Member LLC vs. Multi-Member LLC
The key difference between a single-member LLC and a multi-member LLC is the number of owners – MMLLCs by definition have at least two.
Additional differences and similarities are touched on in the following table.
| Similarities | Differences |
|---|---|
| Similar personal asset protection via the ‘corporate veil’. | MMLLCs have slightly more completed tax obligations |
| Both offer flexible management structure | MMLLCs by nature allow for more expertise and finance generation – 2 (or more) heads are better than one. |
No one can decide which structure will suit your business better than you. It is important to carefully consider multiple factors such as taxes, finances, and expertise when looking at starting your own business.
How to Form a Single-Member LLC
While more involved than forming a sole proprietorship, forming an SMLLC is not an extremely involved process.
Follow this list to ensure you don’t miss anything out, but remember: ensure you are aware of your local state/area’s protocol in forming a business and carry out any location-specific steps that may be required.
- Choose your LLC name
- Select your registered agent
- Do the paperwork
- Create an operating agreement
- Obtain an EIN and business license
- Choose your tax classification
Quick Start – Use a business formation service like Incfile to help you with some of the details of this process, consider employing a business formation service to make the setup run smoothly.
Is a single-member LLC right for me?
Congratulations on reaching the end of the article. If you are an entrepreneur looking to enter the business world, we sincerely hope this information has been of value.
There will be constant and ever-changing opportunities to learn in your business career.
Being continually willing to take these on is one of the best ways to progress down whatever avenue you decide to take. Good luck!
FAQs
Does a single-member LLC need an EIN?
It is strongly recommended that a single-member LLC obtains an EIN.
In the absence of one, the owner’s social security number is made public – putting their identity at risk.
How to pay yourself in a single-member LLC?
There are multiple options, depending on the structure of your SMLLC:
– As a sole proprietor, you will distribute profits to yourself.
– As an S-corp, you allocate yourself a salary. Profit on top of this is considered business profit.
– As a C-corp, you can allocate yourself a salary while still being able to distribute profit to yourself as personal income.
Is a single-member LLC good for tax purposes?
Owners of single-member LLCs have multiple options available to them regarding the payment of tax, making it a very versatile business structure for tax purposes.
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