If you’re starting an LLC, the business entity formation process is one of the first and most important hurdles. This step can be terribly complex ...
A Guide to a Single-Member LLC
Written by: Carolyn Young
Carolyn Young is a business writer who focuses on entrepreneurial concepts and the business formation. She has over 25 years of experience in business roles, and has authored several entrepreneurship textbooks.
Edited by: David Lepeska
David has been writing and learning about business, finance and globalization for a quarter-century, starting with a small New York consulting firm in the 1990s.
Updated on October 2, 2023
A Guide to a Single-Member LLC
Limited liability companies (LLCs) can have one owner, also known as a member, or multiple owners. As a result, there are two main types of LLCs – single-member LLCs and multi-member LLCs.
If you’re planning to form an LLC, this handy guide explains all you need to know about owning and operating a single-member LLC.
What is a Single-Member LLC?
A single-member LLC is simply an LLC with one owner, who controls its financial interests and receives all profits. The member also has full control over how the LLC is taxed and managed.
Understanding a Single-Member LLC
Forming a single-member LLC is the same as forming a multi-member LLC. A document, usually called the articles of organization, is filed with the state.
In a single-member LLC, the LLC is considered a separate entity from the owner. This means the LLC has its own assets and debts. Because of this, you have personal liability protection. The LLC is responsible for the debts and obligations of the LLC.
Taxation – How does a Single-Member LLC file taxes?
A single-member LLC is, by default, taxed as a sole proprietorship. The LLC does not file a tax return and is not taxed. Profits and losses instead pass through to you, the single-member, to be reported on your personal tax return on a Schedule C.
Yet if you and your tax advisor determine it to be financially beneficial, you can elect to have your LLC taxed as an S-Corporation or a C-Corporation. This may be beneficial when your LLC reaches a certain level of income.
Single-member LLC vs. Sole Proprietorship
Single-member LLCs and sole proprietorships have several similarities.
- Both have a sole owner with full control
- Both are seen as disregarded entities by the IRS and have pass-through taxation
- Neither is required to obtain an Employer Identification Number (EIN), unless they hire employees. A multi-member LLC, on the other hand, must have an EIN for tax reporting purposes, whether it has employees or not.
There are several key differences as well.
- An LLC needs to register with the state and pay a fee; a sole proprietorship does not
- The LLC member can choose how the LLC will be taxed; a sole proprietor cannot
- A sole proprietor has no personal liability protection.
The final difference is the main differentiator between an LLC and a sole proprietorship. Many new business owners choose to form an LLC due to the personal liability protection it offers.
Pros and Cons of a Single-Member LLC
- Full control over management
- Disregarded entity status with pass-through taxation
- Options in terms of the LLC’s tax status
- Personal liability protection
- No potential for member disputes
- High formation costs
- Must keep personal and business finances separate to maintain personal liability protection
- Reporting requirements
How to Form a Single-Member LLC
Forming a single-member LLC, as mentioned above, is much like forming a multi-member LLC. The steps generally go as follows:
- Choose your LLC name and make sure it’s available
- Select a registered agent, which is a person or company appointed to accept official correspondence. Nearly all states require a registered agent. You can be your own registered agent or appoint a person or company that meets your state’s requirements
- File articles of organization with your state and pay the formation fee
- Follow your state’s annual reporting requirements
Single-Member LLC FAQs
Yes, a single-member LLC can have employees. If you hire employees, you’ll need to obtain an Employer Identification Number (EIN) from the IRS.
A single-member LLC is only required to obtain an EIN if it has employees. Otherwise, the sole member’s social security number can be used for tax reporting purposes.
While an operating agreement is only required in a handful of states, it’s critical to have one, even for a single-member LLC. It should contain procedures for adding a partner later and transferring ownership, as well as provisions for what happens to the LLC if something happens to the sole member.
You simply take distributions from the profits of the business by writing yourself a check from the LLC’s business bank account. Then you’ll record it in your books as an owner’s draw.
Generally, a husband and wife are not considered a single-member, thus the LLC would be treated for tax purposes as a partnership. However, some states with community property laws have rules that may override that general rule and allow the LLC to be classified as a disregarded entity.
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