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What Is a Single-Member LLC?

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Published on January 18, 2022

Updated on January 20, 2022

What Is a Single-Member LLC?

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What Is a Single-Member LLC?

Starting a business involves making a lot of decisions, one of which is the type of business entity you choose to form. A limited liability company (LLC) is a common choice. A single-member LLC is an LLC with just one owner, as the owners of an LLC are called members. 

An LLC is a business entity that offers liability protection for owners, as well as pass-through taxation, much like a sole proprietorship. To learn more about LLCs, read this Step By Step article.

Sole Proprietorship vs. Single-Member LLC

A sole proprietorship is the simplest type of business entity. It’s a business with one owner that is not an LLC or corporation. If you operate a business and you don’t form another type of business entity, your business is automatically considered a sole proprietorship. There is no paperwork to file. You and the business are the same in a sole proprietorship, therefore you are personally liable for the debts and obligations of the business. 

In a sole proprietorship, the business name is your name, unless you register a DBA. “DBA” stands for “doing business as.” Simply put, it’s a name that is registered for a company to do business under that is not it’s legal business name. A DBA name is also sometimes called a fictitious name or a trade name. 

An LLC, including a single-member LLC, offers liability protection for the owner, and greater flexibility than a corporation, particularly in terms of taxes. An LLC is created by filing paperwork with your state, and nominal fees are involved. 

An LLC offers its members considerable flexibility in terms of management. You can choose your management and operational structure and decide how you want to be taxed. Your LLC can have a single member or multiple members, all of whom have personal liability protection, meaning your personal assets are not at risk if you cannot pay business debts or are involved in a lawsuit.

A sole proprietorship and a single-member LLC have only one owner, and are taxed the same way. A single-member LLC is considered a disregarded entity by the IRS for federal tax purposes and is taxed like a sole proprietorship. Business income “passes through” the company to the single member, who reports profits and losses on his or her individual tax return.

The LLC itself is not taxed, which simplifies the process. Also, losses and operating costs of the business can be deducted personally by the single-member. Taxes are paid at the personal tax rate of the member, although the owner may also have to pay self-employment taxes.

Can a Single-Member LLC Be Taxed as a Corporation? 

LLCs are unique in terms of taxation as their owners have a choice about how the company will be taxed. By default, an LLC is taxed like a sole proprietorship if it has one member and a partnership if it has more than one member.

But LLC owners, even in a single-member LLC, can instead choose to be taxed as a corporation. To do so, the LLC must file a document, referred to as an election, with the Internal Revenue Service (IRS). The LLC must then decide if it wishes to be taxed as an S corporation or a C corporation.

C Corp status means profits are taxed at the current rate for corporations (21% as of early 2022), which is significantly lower than the typical individual taxpayer rate. But keep in mind, C Corp shareholders, which includes members, must also pay taxes on their distributions (but not self-employment taxes). Thus, the C Corp is subject to what is sometimes referred to as double taxation. 

Many LLCs choose to be taxed, alternatively, as an S Corp. As with sole proprietorship and partnership status, S Corp taxation considers the LLC a pass-through entity, which means income passes through the company and into the hands of the owners. At this point, taxes are applied at the same rate as those of individual taxpayers.

S Corps use Form 1120S to file their taxes, which is used to report the income, losses, and dividends of shareholders. S Corp shareholders do not pay self-employment taxes, which is the primary advantage of S Corp status compared to sole proprietorship or partnership. 

Generally, S Corp tax status is beneficial if the company is profitable enough to pay the owners a salary and at least $10,000 in annual distributions. That way, the owners are taxed as employees and do not pay self-employment taxes. It costs more to run an S Corp than an LLC due to additional bookkeeping and payroll expenses. Thus, the tax benefits should be more than the additional costs for an S Corp status to make financial sense. 

Additional Benefits of Forming a Single-Member LLC

  1. Simplicity. An LLC is simple to form, requiring much less paperwork than a corporation. You only need to file Articles of Organization and have an Operating Agreement to define ownership and roles and responsibilities. There are no annual meeting or reporting requirements, as with a corporation, and you don’t need a board of directors. In some states, however, you do have to file an annual report for an LLC. It’s also less expensive to form an LLC. Corporations and partnerships are best formed with the assistance of an attorney, which is expensive. It is a good idea, however, to have your LLC’s operating agreement reviewed by an attorney. Corporations also pay fees for their required annual filings.
  2. Control. In an LLC, you can be the only owner, just like a sole proprietorship, and have full control of the business. You don’t have to answer to a board of directors or anyone else. You have more freedom to make decisions than you do in another type of business structure, other than a sole proprietorship.
  3. Limited Personal Liability. Unlike a sole proprietorship, an LLC is considered a legal entity that is separate from you, as the owner. Just as in a corporation, your personal assets are protected because you are not personally liable for the company’s debts or legal liabilities. In a sole proprietorship or general partnership, your personal assets such as your home are at risk if there are unpaid debts or legal liabilities. There are some instances in which an LLC owner, however, could have personal risk. For example, if you are asked to personally guarantee a business loan, you are personally liable for the debt.
  4. Tax Advantages. In addition to the tax flexibility that an LLC offers, the LLC member also may be eligible for the 20% pass-through deduction of the Tax Cuts and Jobs Act, meaning they can deduct up to 20% of business income. 
  5. Credibility. An LLC has the advantage of having more credibility to customers and vendors than a sole proprietorship. As a matter of perception, people tend to see an LLC as a more established company, as opposed to a one-person show.

In Closing

A single-member LLC is simply an LLC with only one owner. It is considered a disregarded entity by the IRS for federal tax purposes and is taxed as a sole proprietorship unless the owner chooses to be taxed as a corporation. It’s recommended that you seek the advice of an attorney and a tax advisor before making a decision about which business entity and tax status are right for you.

Forming an LLC is a simple process laid out in this Step By Step article.