Fact checked for accuracy by Billie Anne Grigg, a bookkeeper and Mastery Level Certified Profit First Professional.
Are you confused about choosing the best business entity for your business?
It can become stressful when you’re not sure which direction to go in. If you’re starting an LLC, you can choose to be a single-member LLC or a multi-member LLC.
Single-member LLCs are pretty straightforward, so we’ll go over advantages, disadvantages, tax situation, and more.
Let’s dive in and help you answer the question, what is a single-member LLC?
What is a Single-Member LLC?
The first thing to understand when defining a single-member LLC is that LLC stands for limited liability company. You may have started your business as a sole proprietorship because of its simplicity. A sole proprietorship doesn’t entail fees and forms. It’s the simplest way to get your business up and running.
However, it’s now time to look at protecting your personal assets via the LLC avenue. Simply put, a single-member LLC is a one-member limited liability company.
Suppose you don’t choose to treat your single-member LLC as a corporation for tax purposes. In that case, you report all business income and expenses on your individual Form 1040 using an attached Schedule C. You’ll file a separate tax return for the LLC to report business income and expenses if you elect to treat the LLC as a corporation.
You might have heard that some states don’t allow single-member LLCs. This is outdated information that still appears now and then. You should know that all 50 states do allow for single-member LLCs.
There was a time when many states didn’t allow the single-member LLC and required anyone forming one to add another person to the entity. You can rest assured that single-member LLCs are legal across the United States.
Differences Between Multi-Member LLCs and Single-Member LLCs
The most significant difference between a single-member LLC and a multi-member LLC is that a multi-member LLC includes two or more owners. Other differences exist, however, and they include issues such as:
- Personal asset protection
You can also add members to your LLC, which you can learn more about in our article linked here.
Both types of entities must complete compliance activities to maintain personal liability protection and to maintain the entities themselves.
These tasks include keeping company records (articles of organization, tax returns, financial records, and other such items), paying fees and taxes, renewing permits and licenses, holding annual meetings, and submitting the annual report.
Typically, these requirements are less complex for a single-member LLC.
You are the only manager when running a single-member LLC. Multi-member LLC owners decide between two management options:
- Member-managed LLC: All LLC members participate in the day-to-day operations of the business. Majority decisions, such as securing loans or entering contracts, require majority approval.
- Manager-managed LLC: Members select one or a group of members to run the day-to-day operations.
As you might expect, one owner (member) maintains complete control over the business inside a single-member LLC.
Two or more members share control of the company when operating as a multi-member LLC. The LLC chooses how to distribute profits and losses among the members.
Both of these ownership possibilities have advantages and disadvantages. Sometimes, multiple owners decide to use one or more single-member LLCs while conducting business. Single company owners sometimes choose to create a multi-member LLC and add a relative or spouse as a second owner.
Personal Asset Protection
Your personal assets stay protected inside either a single-member LLC or multi-member LLC. From a legal perspective, your LLC exists as a separate entity. This insulates your personal property if the business can’t pay financial debts or someone sues the company. Generally speaking, you won’t need to worry about losing personal assets such as:
- A personal home
- Retirement savings
- Bank accounts
- Personal vehicles
You should know that some situations end up with you classified as personally responsible. These cases do put your personal assets in danger.
This can happen if a member mismanages the LLC, compromises the business/personal line of separation (guaranteeing a business loan, for instance), or becomes involved in illegal activities. Paying yourself correctly is an important part of keeping that distinction, so read our article on how do I pay myself from my LLC for more information.
Advantages of a Single-Member LLC
Many advantages exist when using a single-member LLC to run your business. The first is something called pass-through taxation. This is a tax classification where business profits get taxed at the member level instead of the LLC level. Pass-through taxation helps you avoid double taxation.
This entity comes with less recordkeeping or administrative paperwork when compared to other entities like corporations. The limited liability aspect represents a tremendous advantage for protecting your personal assets against the actions of the LLC or its inability to pay its debts.
An LLC’s classification is one called an “enduring legal business entity.” This means it lives beyond the death or illness of any company owner and helps avoid problems for your heirs that enter the picture when running a business as a sole proprietor.
An LLC comes with what’s called a “check the box” taxation rule. Depending on your situation, you have the flexibility to choose your taxation method. You can select from these options:
- Sole proprietor
You won’t ever lose control of the company by a board of directors take-over when using the single-member LLC designation. However, management power can become centralized in a board via the operating agreement.
An advantage in some states is that some of them don’t require an annual shareholder meeting. One of the largest single-member LLC advantages is that you can set one up with only one natural person involved.
Lastly, you can assign LLC membership interests without transferring the title over to the assignee. However, the assignee can benefit financially from the profit and loss distributions of the company.
Disadvantages of a Single-Member LLC
A single-member LLC does come with disadvantages you should know about.
You’re required to fill out more paperwork to change from doing business as a sole proprietorship to a single-member LLC. You don’t even need to keep your own records when starting a sole proprietorship. You will need to fill out and file documents such as the articles of organization when starting the LLC.
An LLC can’t become classified as a partnership unless it’s a multi-member LLC. This means you can’t elect to the partnership classification when filing federal taxes for your single-member LLC.
Typically, you’re subject to self-employment taxes when paying tax on LLC earnings. Other entities, such as an S corporation, aren’t subject to self-employment taxes. In an S corporation, earnings get passed through as profit distributions after paying shareholder salaries.
Depending on the state you live in, you might discover that your state tax board taxes LLCs and not partnerships. Overall, many differences exist when it comes to how various states treat limited liability companies. If you operate your business in more than one state, then you’ll need to watch out for this inconsistent LLC treatment.
Your operating expenses increase when forming an LLC. You need to pay fees that aren’t required when operating as a sole proprietorship.
Limited liability companies are easier to dissolve than corporations, meaning greater business asset access exists. This means LLCs typically experience lower minority discounts than corporations when conducting estate planning.
The Single-Member LLC Tax Situation
Unless you indicate otherwise, the federal government treats you as a sole proprietorship for tax purposes inside a single-member LLC. This means that you file your LLC information on your federal personal 1040 tax return. The LLC itself doesn’t need to file a return or pay the tax.
Consider Getting Taxed as a Corporation
Your single-member LLC can elect to get treated as a corporation for tax reasons. You might go in this direction when you need to keep a large portion of business profits in the limited liability company. This is a concept called retained earnings.
Use Internal Revenue Service Entity Classification Election when filing to select the treatment of your LLC as a corporation for tax purposes. You simply check off the form’s corporate tax treatment box.
Based on the post-2018 tax regulations, your single-member LLC will benefit from a flat 21% tax basis when classified as a C corporation for tax purposes. Depending on your income level, your individual sole proprietorship tax rates will range from 32% to 37%.
On the other hand, a C corporation is subject to double taxation. This happens when shareholders pay up to a 24% tax on dividends plus the 21% corporate tax. Keep in mind, however, that double taxation rules don’t apply to retained earnings. You can also offer benefits after electing C corporate taxation that you can’t offer as an LLC. These include:
- Stock ownership plans
- Stock options
- Other tax-advantaged fringe benefits
Double taxation rules don’t apply to these extra benefits.
Paying Estimated Income Taxes
You’re considered a self-employed business owner, not an employee, when acting as an LLC member. Unless you organize as an S-corp, in which case you can be considered an employee as well. This means you aren’t subject to normal employee tax withholding.
In this case, you have a responsibility to set money aside to use for paying taxes on your share of the company’s profits. The IRS asks you to do this in the form of quarterly estimated tax payments. You need to estimate your final tax bill and pay it in equal payments each April, June, September, and January.
If your selected tax classification requires your LLC to file a tax return, then you do this in March of each year instead of April.
How to Form a Single-Member LLC
Here are steps to take when forming your single-member liability company.
Start by making sure that your business name is available. Your state should allow you to conduct a name search on their secretary of state website. Each state typically lets you reserve the name you want if you’re not ready to start the LLC immediately.
Every LLC requires a registered agent. Anyone can act as the registered agent, as long as they have a physical address in the state where you register the LLC. A registered agent exists to accept legal documents, such as tax mailings or lawsuit filings, that relate to your LLC. It’s usually better to hire a third-party registered agent, as opposed to acting as your own.
Download the articles of organization and LLC operating agreement from your state’s secretary of state website, fill them out, and then submit them with the required filing fees.
A single-member LLC doesn’t require a federal tax ID number. You can transact business under your Social Security number. However, lenders and banks often ask for a federal tax ID number so it’s a good idea to obtain it for free on the IRS website.
Finally, open a bank account in the LLC name and you’re ready to conduct business.
The Last Word
A single-member liability company is a good way to gain personal asset protection and some tax advantages when you run your business by yourself. If this type of LLC fits your needs, then your next step is to start the paperwork process. If you’re still not sure, head over to our pros and cons of LLCs guide for more research.
Filed under: Advice Columns