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.
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.
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).
To create an LLC, follow these five steps:
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.
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.
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:
Read our single-member LLC tax guide for additional details.