Why a Single-Member LLC?
A single-member LLC only has one member (owner). The owner can manage the business or hire a manager to run the business. (see: member-managed vs manager-managed)
The owner gains limited liability protection. This means they are not personally responsible for the business. The IRS regards a single-member LLC as a separate business entity apart from the business owner (see: disregarded entity).
Single-Member LLCs Pros and Cons
A single-member LLC offers several advantages. Here are some pros and cons of starting an LLC.
- Limited liability protection
- Greater privacy (the business name is listed, not the owner's name)
- Pass-through taxation (see: pass-through taxation)
- Can have a Doing Business As (DBA)
- Taxation can be reduced
- Fewer publicly available records (see: LLC Books and Record-Keeping)
- Not required to hold annual meetings or keep minutes
- No formalities are required for maintaining the LLC
- Can be managed by one or more managers (see: Member-Managed vs. Manager Managed)
- Must file formal paperwork with the state (including paying a fee)
- Must file an annual report with the state
Recommended: Learn More about the benefits of an LLC.
Business Structure of a Single-Member LLC
An LLC is also known as a “single-member LLC” because it’s owned by only one member. This means that the owner doesn’t need permission from anyone else to operate the business.
An LLC is a separate legal entity from its owners. In fact, it’s often referred to as a “pass-through” business because its profits are passed directly to the owners’ tax returns.
Recommended: Learn more about how to choose a business structure.
Member Managed vs. Manager Managed
A member-managed LLC is right for smaller LLCs with fewer members and employees. And is best for owners who want to be involved in the daily operations of the business.
A manager-managed LLC is right for larger businesses with more members and more employees. And is best for owners wanting less involvement in the daily operations of the business.
Recommended: Read up more on Member Managed vs. Manager Managed LLCs
Sole Proprietorship vs Single Member LLC
A sole proprietorship is not a formal business structure. The owner is the business. Therefore the owner is legally responsible for all business liabilities and losses.
This means if the sole proprietorship is sued for negligence or debt the owner is personally responsible.
It is not advisable to start a sole proprietorship because a lawsuit can wipe out an owner's personal savings, they can lose their home, they can lose everything.
A single-member LLC is a formal business structure. The owner is not the business. The IRS regards an LLC as a separate business entity. This means the owner is not responsible for the losses and debts of the business. Losses won't affect the owner's personal credit rating. Owners are protected from personal losses, like losing their personal residence, retirement savings, etc.
Single-Member LLC vs. DBA
While a single-member LLC is a formal business structure, a DBA (Doing Business As) is not. A DBA is a fictitious name. An LLC may adopt a DBA. An example of this is the company Meta, Inc. which does business as Facebook. Another example is Alphabet, Inc. which does business as Google.
Where DBAs come in especially useful is with franchising. A company like Subway, Inc. sells franchises to independently owned LLCs. These unbranded LLCs do business as (DBA) "Subway" because the Subway brand name is what sells the product (subs).
Single-Member LLC and Corporate Veil
Piercing the corporate veil means mixing personal assets with business assets. When the corporate veil is pierced the business owner of the LLC no longer has limited liability protection. This means they can be held personally responsible for debts and losses. This is why a single-member LLC must have a separate business checking account.
A single-member LLC must take greater precautions than a multi-member LLC when it comes to piercing the corporate veil. This is because owners are often managers. And as such, they may commingle personal and business finances.
To prevent piercing the corporate veil:
- Do not commingle finances
- Adhere to single-member LLC operating agreement
- Sign in the name of the business
- Stay in good standing with the state
Though LLCs are their own legal entity (a separate entity), for income tax purposes they do not have their own federal income tax classification. An LLC is not considered separate from its owner or owners for tax purposes.
This means all income generated by a single-member LLC passes through the business to the sole owner when filing taxes. With pass-through taxation, all business income is taxed as personal income, reported on the owner's personal tax return.
Single-Member LLC and Self Employment Tax
Single-member limited liability companies are taxed as disregarded entities. This means they are not taxed separately from the business and instead undergo pass-through taxation.
Pass-through taxation occurs when all business profits “pass-through” to the business owner. You pay income tax on the business’s profits when you file your personal tax return.
Under the default LLC tax status, you can pay yourself a distribution of your total business profits. Because you already paid income tax on all business profits, you only have to pay self-employment tax on your distribution.
Recommended: Learn more about paying yourself as a disregarded entity.
Single-member LLCs can also be taxed as a C corp or as an S corp. These statuses have more regulations than the default LLC tax status. C corp and S corp owners pay themselves reasonable salaries and do not have to pay self-employment taxes.
For More Information: Check out our Single-Member LLC Taxes page.
Forming a Single-Member LLC
To form an LLC you are required to do certain things. Doing these things in the right order matters and makes the process much easier and less time-consuming. Here are the things you must do and the order we recommend you do them in:
Select a State (where your business will operate)
Usually, it makes the most sense to form an LLC in the state where you'll be doing business. For most business owners starting a limited liability company, this will be the state in which they reside.
Name your LLC (make sure the name is available)
When you name your business you must check with the state to ensure the name is not already in use by another company. The way to do this is to check with the secretary of state. For example, if you reside in Florida you would need to check with SunBiz.
Note: A single-member LLC can have a separate name for its DBA.
Use a Registered Agent (important for receiving regulatory mail)
A registered agent is someone who receives all-important mail for the company. The registered agent also files the annual report. A registered agent is the professional point of contact for your business. A registered agent can be yourself or outsourced to a registered agent service.
Recommended: Find the best registered agent service for your LLC.
File Articles of Organization (file with the state or states)
File Articles of Organization in the state or states in which you do business. You will name yourself or your business entity as the principal member of your organization. Each state charges a filing fee payable by the LLC owner.
Create an Operating Agreement (how the business will operate)
Like all LLCs, a single-member LLC can be designated as either member-managed or manager-managed. If you do not choose a designation on your Articles of Organization, your default setting will be member-managed. This means that you are both the owner and manager of the company. This is the most common designation for single-member LLCs.
For some, though, setting up a manager-managed LLC makes more sense. In this format, the owner of the company retains control of the business but can hire one or more people to handle the day-to-day management responsibilities. Any single-member LLC can choose this route, but it is particularly useful for businesses with more than one location, such as restaurants or retail stores.
A Limited Liability Company Should Have an EIN
An EIN is an employer identification number. It is the business's tax ID number. It serves the same function as a social security number, only it's for businesses. It is free and simple to get an EIN.
The Internal Revenue Service (IRS) does not require a single-member LLC to have a separate tax identification number because it regards it as a disregarded entity. Though a single-member LLC does not need an Employer Identification Number (EIN) it definitely should have one.
However, if you don't have an EIN for your business you risk piercing the corporate veil. And this defeats the purpose of starting an LLC.
Note: A business also needs an EIN for employment tax purposes.
Get a Business Bank Account
For a limited liability company, business income must be kept separate from personal income because it is a separate legal entity. That means you have to use a business bank account for federal income tax purposes. You must use this account for business expenses only, it is not for personal use like with a sole proprietorship business structure.
Benefits Over Other Business Structures
Choosing a single-member LLC over another business type such as a sole proprietorship or a corporation offers several benefits.
Registered businesses often carry increased stature in the minds of potential investors. It is generally more difficult to attract investment funds to a sole proprietorship than to an LLC.
As a single business owner, registering as an LLC can also add credibility to your operation in the eyes of prospective customers. Many people feel more comfortable working with a business rather than an individual.
A single-member LLC can choose to be taxed as either a sole proprietor or a corporation, depending on what format will produce the best financial outcome. This decision should be made under the advice of a tax professional.
Unlike a sole proprietorship, a single-member LLC can be owned by either a person or a single entity such as another LLC or a corporation.
Ease of doing business
While a single-member LLC offers the limited liability protection of a corporation, it is not required to follow the same formalities, such as issuing stock, creating and adopting bylaws, and holding annual shareholder meetings.
A limited liability company is an extremely popular business structure for a reason. It is easy to form and maintain, offers attractive liability protection and flexible taxation options, and lends itself well to almost any type of business.
Frequently Asked Questions
Can a single-member LLC hire employees?
Yes. A single-member LLC can hire employees.
Is it OK to be a single-member LLC?
A single-member limited liability company is best for businesses with one owner. If your business will have more than one owner you'll want to start a multi-member LLC.
What is considered a single-member LLC?
A single-member LLC is a formal business structure with one owner. To be considered a single-member LLC you must register the business with the Secretary of State (or state business office). This requires registering the name of the business, submitting Articles of Organization, and paying a registration fee.
What is the difference between a single-member LLC and an LLC?
A single-member LLC has only one owner. An LLC is a general term for all limited liability companies. An LLC can be a single-member LLC or a multi-member LLC. It can be structured as a c-corp or as s-corp. An LLC offers more flexibility than a traditional corporation and more protections than a sole proprietorship.
Is a single-member LLC the same as a sole proprietorship?
No. A single-member LLC is not a sole proprietorship. Some people start a sole proprietorship business instead of a single-member LLC. This is a mistake since sole proprietors are held personally responsible for all business liabilities and losses. Unfortunately, a lot of new business owners don't know the difference between a sole proprietorship vs. an LLC
The most recommended business structure for a single person wanting to start a business is a single-member LLC.