A single-member limited liability corporation (LLC) is a one-person business form that provides personal liability protection and pass-through taxes.
While the company is a distinct legal entity and the owners are protected from personal responsibility, the Internal Revenue Service (IRS) classifies single-member LLCs as disregarded companies by default. That is, instead of being taxed at the corporate level, the company’s revenues and losses are passed through to the owner’s personal tax return.
Table of Contents
Topics:
Meaning and Definition of Single-Member LLC
Should I Create a One-Member LLC?
How to Create a One-Member LLC
Taxes on a Single-Member LLC
FAQs on Starting a Business Single-Member LLC
Meaning and Definition of Single-Member LLC
A single-member LLC is a legal entity with just one owner. A limited liability company (LLC) provides the personal responsibility protection of a corporation as well as the pass-through taxes of a sole proprietorship.
While the company is a distinct legal organisation that protects the owners from personal accountability, the IRS defaults to treating single-member LLCs as disregarded businesses. That is, instead of being taxed at the corporate level, the company’s revenues and losses are passed through to the owner’s personal tax return.
Single-member LLCs are popular because they allow single proprietors to avoid the double taxation and administrative burdens of a corporation while still providing personal asset protection.
Should I Create a One-Member LLC?
The particular qualities and demands of your firm will determine whether a single-member LLC is the ideal business structure for you. A single-member LLC may provide the following benefits:
Personal Liability Protection: If your company goes bankrupt or is sued, an LLC corporate structure will safeguard your personal assets.
Less Paperwork Than Corporations: A single-member LLC requires less paperwork to establish and maintain than a corporation. This may also lower certain costs, such as legal fees.
There is no double taxation since corporations pay taxes at the corporate level and their owners pay taxes on profits received. This is often known as “double taxation.” Single-member LLCs do not pay corporation tax by default. Instead, business gains are passed through to the owner’s personal tax return.
Increased Customer and Creditor Credibility: Operating your firm as a single-member LLC rather than a sole proprietorship under your own name will help it seem more professional.
Greater Tax Flexibility: By default, single-member LLCs are treated as disregarded entities, but they may elect to be taxed as a S corporation (S corp).
How to Create a One-Member LLC
To create an LLC, follow these five steps:
Your Company’s Name
Select an LLC. File for Registered Agent The Articles of Organization of your LLC
Make an Operating Agreement for your LLC.
Obtain an EIN
You may create an LLC yourself by following our free How to Form an LLC guide, or you can hire an LLC formation service to do it for you.
Step 1: Give Your LLC a Name
When you submit the formation paperwork for your LLC, you must offer your state with a unique and available name.
Step 2: Select a Registered Agent for your LLC.
Legal paperwork and tax notifications will be accepted on your LLC’s behalf by your registered agent. When you submit your LLC’s Articles of Organization, you must provide the name and address of your registered agent.
Step 3: File the Articles of Organization for your LLC.
The Articles of Organization — sometimes known as a Certificate of Formation or a Certificate of Organization in certain states — is the document that must be filed with the state in order to properly register an LLC.
Step 4: Draft an Operating Agreement for your LLC.
An LLC Operating Agreement is a legal agreement that defines your LLC’s ownership and member responsibilities.
Step 5: Obtain an EIN
The IRS issues and uses an Employer Identification Number (EIN) to identify and tax firms. It’s basically a business’s Social Security number. Even if your single-member LLC has no employees, we recommend obtaining an EIN after forming your LLC. When you apply directly with the IRS, EINs are free. For details on how to get your free EIN, please see our What Is an EIN? page.
Taxes on a Single-Member LLC
Single-member LLCs are treated as disregarded entities by default by the IRS, which means they are liable to “pass-through taxes.” Flow-through taxation refers to the fact that the company’s income and losses are not taxed at the corporate level, but instead pass through to the owner’s personal tax return. Profits from the firm are subsequently taxed at the owner’s personal income tax rate.
This is in contrast to companies, which face double taxes. Corporations must pay a corporation tax on their earnings, and their shareholders must pay a dividend tax on any dividends received.
However, one downside of forming a single-member LLC is that owners must pay both personal income tax and self-employment tax. This self-employment tax includes both the employee and employer contributions to Social Security and Medicare. The current rate of self-employment taxation is 15.3%.
Importantly, the Tax Cuts and Jobs Act of 2017 established a 20% tax deduction for pass-through entity owners. This implies that owners may deduct up to 20% of the company’s qualifying business income (QBI) on their personal tax return – subject to certain limitations.
How to Begin a Business
After you’ve learned about the benefits and drawbacks of a single-member LLC and decided whether it’s the proper business structure for you, you’ll need to actually create the company. Whether you join a single-member LLC or not, you must first accomplish a number of additional requirements before you can begin selling your goods or services.
Check out our state-by-state How to Start a Business guidelines for additional information on those other responsibilities. Meanwhile, here’s a brief rundown of the essential procedures you must perform after creating your company:
Fill out a tax return
Establish corporate banking and credit accounts.
Create an accounting system.
Obtain all necessary licences and permissions.
Purchase proper insurance.
Create a web presence
FAQs for Single-Member LLCs
What are the advantages of forming a single-member LLC?
Personal asset protection, fewer paperwork than corporations, better tax flexibility, and enhanced confidence with clients and creditors are some of the benefits of a single-member LLC form.
What are the disadvantages of a single-member LLC?
Members (owners) of LLCs must pay self-employment taxes, and LLCs might have a more difficult time recruiting outside investors than corporations.
How can I form a one-member LLC?
It is simple to form an LLC. You may create an LLC on your own using our free How to Form an LLC guide, or you can hire an LLC formation service to do it for you.
What is the cost of forming a single-member LLC?
The state filing fee is the principal expense of founding a single-member LLC. Depending on your state, this cost might vary from $40 to $500. For additional information, see our article How Much Does It Cost to Form an LLC?
How are single-member limited liability companies taxed?
Single-member LLCs are taxed as pass-through businesses by default. That is, the proprietor pays personal income tax on the earnings of the firm.
Read our single-member LLC tax guide for additional details.
Where should I establish an LLC?
While there may be advantages to creating an LLC in certain states, it is advisable to register an LLC in the state where it will be situated or do business.
Is a lawyer required to incorporate a single-member LLC?
You can normally create an LLC without the assistance of an attorney.
How are members of single-member LLCs compensated?
As the owner of a single-member LLC, you may take a distribution (or draw) that will, by default, be reported on your personal tax return. Alternatively, if you opt to be taxed as a S corporation, you may accept a “reasonable” salary and distribution.
What is the difference between a single-member LLC and a S corporation?
An S corporation is a tax categorization, not a form of business organisation, according to the IRS. A single-member LLC has the option of being taxed as a S corporation or as a default LLC. For additional information, see our article What Is the Difference Between an LLC and a S Corp?
Is a single-member LLC or a DBA preferable?
Your company’s specific position and requirements will decide whether a single-member LLC or a sole proprietorship with a “doing business as” (DBA) name is preferable. For additional details, see our DBA vs. LLC page.
What are the Articles of Incorporation?
The Articles of Organization are a public document that is used to establish an LLC. It is known as the Certificate of Organization or Certificate of Formation in various states.