One of the most common types of small businesses in the U.S. is a single-owner business called "single-member limited liability company." A single-member LLC (SMLLC) is a limited liability company (LLC) that has one owner. A single-member LLC is a business entity registered in the state where the company does business.
The term "single member" is a recognition that the LLC has one owner, and that the owners of an LLC are termed "members." As a limited liability company, the single-member LLC has all the advantages—and disadvantages—of other LLCs.
How to Form a Single-Member LLC
To form a single-member LLC, you must go to your state's department of state (business division) to obtain information on the process, including filing the Articles of Organization (or a Certificate of Organization in a few states) and paying a filing fee. After filing this state business registration, you should consider also preparing an operating agreement (similar to by-laws for a corporation) to spell out how you will run this business.
Advantages of a Single-Member LLC
While both the single-member LLC and the sole proprietorship are solo business entities, there are some advantages to having a sole proprietor business become a single-member LLC:
- The SMLLC is now a separate business entity from its owner. It is no longer attached to and identified with the owner for tax or liability purposes.
- The SMLLC is recognized as a legitimate business, with the required "LLC" included in the business name.
- The SMLLC is formed within a state and part of the approval process is a registration of the business name, so no other business in the state may use that name. A sole proprietor may also register a business name with a state, but it's a separate process.
The SMLLC as a Disregarded Entity
An SMLLC is the most common type of disregarded entity, which means that the IRS ignores the business for tax purposes and instead collects taxes through the Schedule C portion of the business owner's personal income tax filing. But the SMLLC is treated as a separate entity for the purposes of paying employment taxes (if the business has employees) and certain excise (use) taxes.
SMLLCs require more paperwork than if you were running a sole proprietorship. In addition to the Articles of Organization, you need to file an annual report with the secretary of state's office, and if you fail to do so your business could be shut down.
One special requirement for SMLLCs is that you need to choose a registered agent who would be charged with receiving legal correspondence to the company. You will also need a physical registered address for the agent (meaning it cannot be a P.O. box).
How a Single-Member LLC Is Taxed
Single-member LLCs are subject to several different kinds of federal and state taxes as a business entity. These taxes are the same as paid by other types of businesses, but the method of payment is different for the SMLLC.
- Federal income tax: As noted above, because an LLC is not a taxing entity, the IRS has designated that single-member LLCs are to be taxed as sole proprietors. A single-member LLC thus reports business income taxes on Schedule C. The net income from this business is combined with other income on the owner's personal tax return.
- Self-employment tax: Single-member LLC owners, like sole proprietors, are considered self-employed and are not employees of their business. As self-employed individuals, single-member LLC owners must pay self-employment taxes (Social Security and Medicare taxes) each year, based on their net income from the business.
Single-Member Tax ID Numbers
Single-member LLCs need an Employer ID Number, even if the business has no employees. Most banks require an EIN to open a business bank account.
If your single-member LLC is a disregarded entity, you should use your personal tax ID (not the EIN) when completing a W-9 form as an independent contractor.
Warning: The following is for informational purposes only and should not be construed as advice. Consult with an attorney before taking any action based on the following information.