What is a Single Member LLC?

A Single-Member Limited Liability Company is a style of entity classification that has one owner (member) who has complete control over the company. Unique to other types, the LLC itself is considered a separate entity, independent of its owner.

How Single Member LLCs Work

The default classification for federal tax purposes is a disregarded entity; thus, tax flows through to the member. This also provides liability protection for the member.

Are Single-Member LLCs similar to Sole Proprietorships?

The taxation is similar; however, the legal natures differ significantly. 

LLC:
    • Personal liability is limited 
    • Needs to be registered in the relevant state
    • Regarded as a legal entity 
Sole Proprietorships:
    • Has full liability 
    • Does not get registered
    • Not regarded as a legal entity

Single Member LLCs vs. Multi-Member LLCs

Ownership
Single-Member LLC Ownership

An SMLLC has one owner (member) who has complete control over the company. The SMLLC is its own legal entity, independent of its owner.

Multi-member LLC Ownership

This LLC has two or more owners (members) that share control of the company. Unless it elects S Corporation tax treatment, there may be an unlimited number of members in a multi-member. The LLC may decide on how (what percentage of) profits and losses will be distributed among its members.

Management

An SMLLC has one member who is also considered the manager. 

However, a Multi-member LLC must decide if they would like the business to be member-managed or manager-managed.

Member-managed LLC

In a member-managed LLC, the members participate in the work of the business. The company requires the majority approval of all of its members when making significant decisions, such as entering into contracts.  

Manager-managed LLC

In a manager-managed LLC, the members agree on a manager, either a particular member or members of the LLC or a third party, to whom they give authority to manage the day-to-day operations and decisions of the business.  

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Personal Asset Protection

Both types of LLCs protect the owners’ personal assets due to their being separate legal structures.   

Owners may, however, be held personally responsible in certain situations. 

Income Tax Treatment
SMLLC Default Tax Treatment

The income tax treatment of an LLC is that the owner reports the business’s profits and losses on Schedule C of Form 1040, and the company does not report or pay taxes independently. The LLC owner also pays self-employment tax using their Social Security number and Medicare) on all taxable income from the business and reports it on their personal tax return. 

Formation

The formations of the types of LLCs are similar:

    • Choose a business name 
    • Apply for an EIN (Employer Identification Number) 
    • Designate a registered agent
    • File Articles of Organization with the state in terms of the applicable state law
    • Complete the Entity Classification Election Form (IRS Form 8832).
    • Create an LLC operating agreement 
    • Open a business bank account
    • Obtain the necessary business licenses and permits
    • Know and abide by the relevant employment laws
    • Learn the requirements to remain in good standing 

Read our blog – Can you Change a Single Member LLC to a Multi Member LLC? – Asena Advisors for more information

Compliance

A Single-member LLC usually has less-complex requirements to fulfill than a Multi-member one. 

Who Needs a Single Member LLC?

There is no right or wrong answer to this, and it will depend on the specific circumstances of the business and individual. However, a single-member LLC is a prevalent structure for small business owners and entrepreneurs. 

How to Form a Single-Member LLC

  1. Step 1: Name Your LLC
    1. Once you have decided on the specific state where you will form the LLC, you will need to register a unique name and not yet used or registered in that state. 
  2. Step 2: Choose an LLC Registered Agent
    1. It is important to choose a registered agent for your LLC who acts as the representative of the LLC in the state of formation. Some of the responsibilities of the registered agent are to accept legal documents on behalf of your LLC and, if needed (which most LLC owners would rather want to avoid), lawsuits. 
  3. Step 3: File Your LLC’s Articles of Organization
    1. You will need to draft and complete the LLC’s Articles of Incorporation on the secretary of state’s website. 
  4. Step 4: Create an LLC Operating Agreement
    1. It is wise to create an operating agreement for the LLC in order to set out the rules of the business entity whenever it is requested by either a financial institution or a potential buyer. The contract will stipulate how these types of transactions should be dealt with. 
  5. Step 5: Get an EIN
    1. Even if the LLC does not hire employees or start trading immediately, you will need an employer identification number (EIN). The LLC needs to have an EIN because if you apply for finance at a bank, they will need the LLC’s EIN, and it is required to complete your return. Applying for an EIN can be done on the IRS’s website.

How To Pay Yourself As A Single Member LLC

You don’t get paid a salary as the owner of a single-member LLC. Instead, you pay yourself by withdrawing the profits made by the LLC as and when needed. It’s also referred to as an owner’s draw. 

Hiring Employees As A Single Member LLC

First and foremost, a single-member LLC can hire employees. You need to ensure that you adhere to payroll requirements. So make sure you withhold payroll taxes when paying employees and paying it over to the IRS. 

Tips For Setting Up An Single-Member LLC

Make sure you understand your state’s specific requirements to remain compliant. For example, you should understand the state’s renewal filing requirements, annual reports, and filing fees. Some states levy fines if you fail to maintain the LLC’s compliance.  

When A Single Member LLC Might Be Wrong For You

There is no one shoe fits all answer to this question, but we can point out certain factors to consider when making this decision.

  • If you are operating as a sole proprietor without any issues, why burden yourself with additional paperwork and compliance required for an LLC.
  • You can’t afford the ongoing maintenance fees.
  • If there is more than one member, it will then be a multi-member LLC, and depending on the members and business, an alternative structure might be more feasible and advantageous. 

The Pros And Cons Of A Single Member LLC

Pros:
    • Flexibility in terms of how you want the LLC to be taxed
    • Very little paperwork and can form an LLC with one person
    • Flow-through of income taxation simplifies your tax returns. 
    • Liability Protection if the LLC has legal issues. 
Cons:
    • The owner is not allowed to pay themselves wages.
    • Depending on the state, renewal fees could be expensive.
    • Many states levy capital values or franchise tax.
    • Investors are more prone to invest in a corporation which could be an issue if you want to raise capital.

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FAQs

  1. How Much Does It Cost To Form A Single-Member LLC?
    1. It depends on the state where the LLC is formed.
  2. How Are Single-Member LLCs Taxed?
    1. The default classification of a single-member LLC is taxed as a sole proprietorship, and therefore the LLC is treated as a disregarded entity for federal purposes. 
    2. You can also elect to be taxed as either a C corporation or an S corporation. This would require the LLC to complete a separate corporate income tax return. 
  3. Do I Need A Lawyer To Form A Single-Member LLC?
    1. No. This is not a requirement. 
  4. How Are Single-Member LLC Members Paid?
    1. By making withdrawals from the LLC’s profits. This is referred to as an owner’s draw.
  5. Does An SMLLC Need An Operating Agreement?
    1. It is generally not required but highly recommendable. 
  6. Does An SMLLC Need An Employer Identification Number?
    1. Yes
  7. What is the difference between an LLC and a single-member LLC?
    1. There is no difference. An LLC is a type of business structure regarded as a hybrid structure that combines features of both a corporation and a partnership. And a single-member LLC means the LLC has only one member. 
  8. What is the point of a single-member LLC?
    1. Single-member LLCs are considered separate legal entity because of how liabilities are treated and therefore protects the owner’s personal assets from being seized to pay for business debts.
  9. Is it better to be a single-member LLC?
    1. It depends and should be dealt with on a case-to-case basis. It is, however, a standard structure for small startups. Contact an advisor for an in-depth analysis of your case.
  10. What is the difference between a sole proprietor and single-member LLC?
    1. The significant differences are:
      1. Every liability of a sole proprietorship is the responsibility of the owner. On the contrary, this is not the case in a single-member LLC, where the member is shielded from liability.
      2. Raising capital is more difficult for a sole proprietor than for a single-member LLC. 
For more information on Subpart F, please contact one of our specialists at Asena Advisors. We make sure that your specific needs are catered for.

Shaun Eastman

Peter Harper