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Single Member LLC: Who Needs One and How to Form It

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Quick Facts — Single Member LLC Lawyers

What is a Single Member LLC?

A single-member LLC is a limited liability company that is owned and operated by only one person. The owner of an LLC is referred to as a “member” of the LLC. Single-member LLCs, often abbreviated to SMLLC is a great option for someone who wants the freedom of a sole proprietorship with the liability protection of an LLC.

State laws vary on the formation and rules that apply to SMLLCs. Some states require a written operating agreement if the sole member of the single-member LLC is also acting as the manager of the LLC.

Single-member LLCs offer the same liability protection as multi-member LLCs and corporations. They are taxed similarly to a multi-member LLC unless the member elects otherwise and is approved by the IRS.

Click here to find out how the IRS classifies single-member LLCs.

How Single Member LLCs Work

Formation- To form a single-member LLC, the owner must complete several steps.

  1. The owner must file Articles of Organization with the Department of State in which the company will be operating. Some states call these formation documents a Certificate of Organization . Each state will require a filing fee with these documents.
  2. Although they are not usually necessary, it is a good business practice to prepare an operating agreement for your SMLLC. Some states will require a written operating agreement so it is important to know your local laws or consult with an LLC lawyer about what is required. The operating agreement is similar to corporate bylaws in that it will outline how your business will run and operate.
  3. The last step that is required for SMLLC formation is to appoint a registered agent . The registered agent is in charge of receiving legal documents and correspondence on behalf of the company. The registered agent is required to have a physical registered address.

Here is an article about expected operating agreement costs .

Disregarded Entity- Unless the single-member LLC elects to be taxed as a corporation, the IRS will designate the SMLLC as a disregarded entity. This means that the business is basically ignored for federal and sometimes state income tax purposes.

Taxes will be collected through the member's personal income tax return and the SMLLC will only be responsible for paying employment taxes if there are employees and certain use taxes.

Taxes- A single-member LLC has the option to elect to be treated as a corporation by the IRS for tax purposes. To accomplish this, the member must file Form 2553 , Election by a Small Business Corporation, with the IRS.

If the SMLLC does not elect to be treated as a corporation, it will be considered a disregarded entity. In this case, all of the SMLLC’s activity like profit and losses will be reported on the member’s personal tax return. The member will use Form 1040 or 1040-SR Schedule C to report the SMLLC’s activity.

Similar to a sole proprietorship, the member of an SMLLC is considered self-employed, not an employee of the company so the SMLLC is subject to self-employment taxes.

Advantages- A single-member LLC offers several advantages to members that a sole proprietorship does not. Some of those advantages include:

  • An LLC is a legally separate entity from the owner. This provides the LLC member with asset protection and liability protection against debts and risks incurred by the company.
  • Having the designation of “LLC” gives your business credibility and makes it more appealing to customers
  • Once your LLC is registered with the state, your business name is protected and no other companies can use it.

Read this article for more information about how a single-member LLC works.

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Single Member LLCs vs. Multi-Member LLCs

The most obvious difference between a single-member LLC and a multi-member LLC is that single-member LLCs only have one owner while a multi-member LLC has two or more owners. However, this isn’t the only difference. There are several aspects of running a business that must be considered when deciding between an SMLLC or an MMLLC.

  1. Ownership Structure- A SMLLC will only have one member while an MMLLC can have an unlimited number of members. Each ownership structure offers advantages and disadvantages. The member of an SMLLC has the freedom to run the business as they please without having to agree with other members. An MMLCC however can benefit from additional capital and more expertise from various members who can all bring something unique to the business.
  2. Management Structure- A single-member LLC is managed by the sole member. A multi-member LLC must choose if they will be member-managed in which all the members of the LLC participate in the management of the company or a manager-managed LLC in which a manager is appointed to run day-to-day operations.
  3. Liability Protection- Both SMLLCs and MMLLCs provide liability protection for the members of the LLC. In both business structures, the members are separate entities from the company so they benefit from asset protection. In some cases, however, owners can be held personally liable for certain business practices.
  4. Taxes- A SMLLC is treated as a sole proprietorship and an MMLLC is treated as a partnership (unless the company elects to be treated as a corporation). Both business structures are pass-through entities . All profits and losses will be reported on the owner's personal income taxes.
  5. Laws- Both business structures are subject to federal and state laws and are required to be compliant to continue operating legally. Generally, multi-member LLCs will have more complicated requirements.

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Are Single-Member LLCs similar to Sole Proprietorships?

Single-member LLCs are similar to sole proprietorships in that both of these business entities only have one owner. The main difference however is that in a sole proprietorship, the owner and the business are the same. In an SMLLC, the business is a separate legal entity from the owner.

Being a separate legal entity provides the owner of the SMLLC with liability protection that the owner of a sole proprietorship does not benefit from. If a lawsuit were to be filed against a company that is structured as a sole proprietorship, the owner could risk losing their personal assets like real estate, vehicles, and personal bank accounts.

If a lawsuit is filed against a single-member LLC, the owner only has to worry about losing what they have put into the business. In most cases, creditors cannot come after any LLC member’s personal assets.

Although SMLLCs benefit from liability protection, they are more complicated to establish and require more paperwork than a sole proprietorship. To establish an SMLLC, the owner must file articles of organization with the state and pay more expensive filing fees.

Both single-member LLCs and sole proprietorships are required to fulfill the following requirements:

  • Obtain an EIN to open a business bank account and hire employees
  • Apply for and obtain any necessary licenses and permits to operate the business
  • Withhold payroll taxes from employee wages

Another similarity is that both business structures are taxed as pass-through entities. This means that the profits and losses for the company pass through the business and on to the owner. The owner is required to file all business activity on their personal federal tax return.

Who Needs a Single Member LLC?

Single-member LLCs are great business structure options for entrepreneurs who require liability protection due to the type of business they operate. An SMLLC works best for the following types of companies:

  • Rental Properties- Entrepreneurs who are going to begin a rental property business will normally opt for an SMLLC due to the benefit of asset protection. LLCs offer owners flexibility to expand and grow all while protecting personal assets.
  • Multi-Entity Structure- Some business owners will set up a “parent” LLC that owns the other SMLLCs. This allows for a consolidated tax return and provides additional protection as your wealth increases.
  • A Start-up that may convert to a corporation- Because LLCs offer great flexibility to owners, it is easy to expand and grow the business. Once the company income reaches a certain level, owners can opt to restructure as an S Corporation.

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