Single Member LLC
A single-member LLC is a limited liability company that has one member (owner). It provides limited liability protection and tax advantages. We recommend SMLLC vs sole proprietorship.
Our Single Member LLC guide will detail the benefits and teach you how to set up a single-member LLC.
Recommended: Let Northwest form your Single-Member LLC for $29 + state filing fee.
Reasons to Form a Single-Member LLC?
The main reason to register a single-member LLC (SMLLC) is to form a separate legal entity that protects your personal assets if the business gets sued for negligence or business debts.
By having a separate entity, a single-member LLC owner has less personal liability than a sole proprietor. Business debts become the responsibility of the business, not the LLC owner.
There are other benefits to starting a single-member LLC:
- A single-member LLC is a simple business entity to start for solo business owners.
- Your business name is protected by the state (only one name can be registered with the state).
- SMLLCs are disregarded entities for federal income tax purposes (You file personal income tax returns, paying business income tax on Schedule C of federal tax form 1040)
- Because your business has an employer identification number, i.e. a taxpayer identification number, that is separate from your social security number, you can establish business credit and get credit cards in your business name.
- Though single-member LLC owners must pay self-employment tax, filing tax forms Schedule SE of federal tax form 1040, they can deduct half of self-employment business taxes on Schedule C of their personal tax return as a business expense, thereby reducing their overall tax burden.
- Single-member LLCs can hire employees but like any other business must withhold payroll taxes, FICA, and medicare. Single-member LLC owners operate their SMLLC similar to the way a sole proprietor does (can hire employees, paying income tax on the owner's personal tax return, etc).
Single-Member LLC Pros and Cons
A single-member LLC is a formal business structure that offers several advantages. Here are some pros and cons of starting an LLC:
Pros
- Limited liability protection
- Greater privacy (the business name is listed, not the owner's name)
- Pass-through taxation
- Taxation can be reduced
- Fewer publicly available records
- Not required to hold annual meetings or keep minutes
- No formalities are required for maintaining the LLC
- Flexible management structure
Cons
- Must file formal paperwork with the state to start an LLC (including paying a fee)
- Must file an annual report in most states
Recommended: Check out our Best LLC Services review to find the best LLC formation service for your small business.
SMLLC Benefits vs. Other Business Structures
Choosing a single-member LLC over another business type such as a sole proprietorship or a corporation offers several benefits, including:
- Investment Opportunities: 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
- Credibility: 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.
- Flexible Taxation: An SMLLC 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.
- Flexible Ownership: Unlike a sole proprietorship, an SMLLC 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.
Sole Proprietorship vs. Single-Member LLC
A sole proprietorship is an informal business structure that doesn't have to register with the state. Sole proprietors assume all of the business's risks and debts. For this reason, only low-risk or low-profit businesses should be sole proprietorships.
Single-member LLCs are formal business structures that are taxed similarly to a sole proprietorship, but single-member llcs are designed to protect personal assets and to legally separate the business from its owner. Most serious business owners choose to form this type of business entity because an LLC legally separates the owner's personal assets from the business and because its easy to pay taxes.
For tax purposes, the sole owner of an SMLLC simply files a personal income tax return when filing taxes since an SMLLC is a pass-through entity. Both federal taxes and state income tax are paid by the single owner of the business.
For more information, visit our Sole Proprietorship vs. LLC guide.
DBA vs. Single-Member LLC
A "doing business as" (DBA) name isn't a type of business structure. A DBA is a fictitious name that can be used by sole proprietors and other business entities for branding purposes.
A common misconception held by business owners is thinking that when they get a DBA, they are creating a formal business structure with liability protection.
But, this is not the case — they are essentially creating a sole proprietorship with a DBA name for branding.
If you aren’t sure if you need an LLC for your business, check out our Should I Start an LLC guide.
Single-Member LLC Taxes
Single-member LLCs have the benefit of being able to choose between being taxed as a disregarded entity, S corporation, or C corporation. As C corporation taxation is rarely used, we will focus on disregarded entities and S corporations.
SMLLCs and Pass-Through Taxation
The IRS treats single-member LLCs as "disregarded entities" by default, meaning they undergo pass-through taxation.
With pass-through taxation, the company's profits from business income pass through to its members to be reported on their personal tax returns rather than being taxed at the corporate level. All profits are only taxed once at the owner's individual income tax rate. Thus the LLC is a disregarded entity, taxed like a sole proprietorship.
SMLLCs and Self-Employment Tax
Under the default LLC tax status, the single-member LLC profit passes through to the owner’s individual tax return and is subject to self-employment tax and income taxes.
SMLLC owners have the option to elect S corporation tax status. Electing S corp status allows business owners to be treated as employees of the business for tax purposes.
In an S corp, the business must pay the owner "reasonable compensation" or "reasonable salary" per IRS guidelines. The owner pays income taxes and payroll taxes (i.e., FICA and Medicare) on their salary. Distributions are only subject to income taxes (i.e., no FICA).
Electing S corporation status won’t make sense for every SMLLC. Learn more about choosing an S corporation in our LLC vs. S Corp guide.
How to Form a Single Member Limited Liability Company
Forming a single-member limited liability company is easy. Our state-by-state LLC formation guides streamline the process into five easy steps.
Six Basic Steps to Start an LLC
Step 1: Select a State
Step 2: Name Your LLC
Step 3: Choose a Registered Agent
Step 4: File the Articles of Organization
Step 5: Create an Operating Agreement
Step 6: Get an EIN
Step 1: Select a State
- Alabama LLC
- Alaska LLC
- Arizona LLC
- Arkansas LLC
- California LLC
- Colorado LLC
- Connecticut LLC
- Delaware LLC
- Florida LLC
- Georgia LLC
- Hawaii LLC
- Idaho LLC
- Illinois LLC
- Indiana LLC
- Iowa LLC
- Kansas LLC
- Kentucky LLC
- Louisiana LLC
- Maine LLC
- Maryland LLC
- Massachusetts LLC
- Michigan LLC
- Minnesota LLC
- Mississippi LLC
- Missouri LLC
- Montana LLC
- Nebraska LLC
- Nevada LLC
- New Hampshire LLC
- New Jersey LLC
- New Mexico LLC
- New York LLC
- North Carolina LLC
- North Dakota LLC
- Ohio LLC
- Oklahoma LLC
- Oregon LLC
- Pennsylvania LLC
- Rhode Island LLC
- South Carolina LLC
- South Dakota LLC
- Tennessee LLC
- Texas LLC
- Utah LLC
- Vermont LLC
- Virginia LLC
- Washington LLC
- Washington D.C. LLC
- West Virginia LLC
- Wisconsin LLC
- Wyoming LLC
Step 2: Name Your LLC
You will need to provide your state with a unique name that is distinguishable from all registered names when you file your LLCs formation documents.
If you need help naming your business, use our free Business Name Generator.
Complete a Domain Name Search
When choosing a business name you'll need to find out whether or not a good web domain name is available. Having a URL that clearly matches your business name is important. This small step can make a big difference in how prospective customers find your business.
Step 3: Choose an LLC Registered Agent
Your LLC registered agent will accept legal documents and tax notices on your LLC's behalf. You will list your registered agent when you file your LLC's Articles of Organization.
Step 4: File Your LLC's Articles of Organization
The Articles of Organization, also known as a Certificate of Formation or a Certificate of Organization in some states, is the document you will file to officially register an LLC with the state.
Step 5: Create an LLC Operating Agreement
An LLC operating agreement is a legal document that outlines the ownership and member duties of your LLC.
Step 6: Get a New EIN
An Employer Identification Number (EIN) is a number that is used by the US Internal Revenue Service (IRS) to identify and tax businesses. It is essentially a Social Security number for a business.
EINs are free when you apply directly with the IRS. Visit our EIN guide for instructions for getting your free EIN.
Recommended: LLC formation services can start as low as $39 plus state fees. Visit our Best LLC Services review to learn more.
Maintaining Your SMLLC's Corporate Veil
The corporate veil is the limited liability protection that is created when you form an LLC or corporation. But, starting an LLC or corporation doesn’t ensure that you’ll have liability protection when you need it.
In order to maintain liability protection, you must maintain the corporate veil. The corporate veil is said to be pierced when the business owner of the LLC no longer has limited liability protection. This can occur for several reasons. The most common (and preventable) is keeping personal and business finances separate. Starting a business checking account is the first step.
An SMLLC 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 personal and business finances
- Create and maintain an SMLLC operating agreement
- Sign business documents in your LLC’s name
- Stay in good standing with the state
Recommended: Check out our review of the best banks for small business.
Frequently Asked Questions
Yes. A single-member LLC can hire employees.
Yes. Many LLCs are owned by only one member. A single-member LLC offers limited liability protection. In a sole proprietorship, the business owner's personal property isn’t separated from the business.
A single-member LLC is an LLC with one owner. To be considered an SMLLC, 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.
A single-member LLC has only one owner. An LLC is a general term for all limited liability companies. An LLC can be an SMLLC or an MMLLC. It can be structured as a C corp or as an S corp. An LLC offers more flexibility than a traditional corporation and more protections than a sole proprietorship.
No. An SMLLC is not a sole proprietorship. Some people start a sole proprietorship instead of an SMLLC. 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.
A sole member LLC is another name for a single-member LLC. An SMLLC is a limited liability company with one owner.
