Single-Member LLC [What Is It & How It Is Taxed]

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Self-employment can be a dream come true or your worst nightmare. If you’re considering starting a small business, one of the US’s most commonly used business structures is a single-member LLC (SMLLC). This article addresses what an SMLLC is, how it works, how it’s distinguished from other business structures, and how it’s taxed.

What Is a Single-Member LLC?

A Limited Liability Company (LLC) is an unincorporated entity with both the corporation and sole proprietorship characteristics. The most common reason why LLCs are formed is for liability protection.

An SMLLC has a type of business structure with one owner (member). A company can have many employees, but in the case of an SMLLC, there is only one who decides the company’s direction. The SMLLC owner is responsible for keeping the company intact. The idea behind forming an SMLLC is to separate the owner from the company’s business altogether—for example, if a lawsuit is filed against that company, the owner has legal protection (his assets cannot be touched).

NOTE: If you think that this type of business structure is right for you, you can learn how to start an LLC through the most popular LLC services listed here.

Single-Member LLC Taxes

When choosing to form an SMLLC, planning your taxation process is a must. But selecting the right taxation arrangement depends on various factors, such as the type of business and industry, and goals. An SMLLC is considered to be a sole proprietorship for tax purposes, but it can also be taxed as a corporation if desired.

Taxed as a Corporation

If you opt for C corporation (C-corp) taxation, your LLC will pay taxes on its gross income. This is because direct payments to the LLC’s profits will be regarded as dividends by the IRS. And because dividends are not deductible business expenses, it undergoes double taxation—profit is taxed twice.

Taxed as an S Corporation

With S corporation taxation (S subchapter), an LLC avoids double taxation. The owner of the SMLLC is not considered self-employed. In a single-member LLC taxed as an S-corp, the owner of the SMLLC is regarded as an employee, allowing to reap some of the company’s profits as salary.

Taxed as a Sole Proprietorship

An SMLLC is considered a disregarded entity, and, as such, the government disregards the business for tax purposes. An SMLLC disregarded entity is a business that is not taxed separately from the owner—business taxes are filed with the owner’s personal tax return.

NOTE: When an SMLLC is treated as a sole proprietorship for tax purposes, the owner must report profits or losses on an IRS Schedule C form and submit it with the 1040 tax return.

Individual/Sole Proprietor or Single-Member LLC

As an entrepreneur, you may find yourself pondering which business structure best fits your criteria. Of course, as with all business structures, an SMLLC and sole proprietorship may share several similar characteristics. But what are the differences between SMLLC vs sole proprietorship?

One primary benefit of establishing an SMLLC is that you immediately separate your business from your personal assets—SMLLC functions as a separate legal entity. Therefore, when deciding to obtain sole proprietorship, you’re considered the same as the business—your personal assets (home, car, etc.) are not protected and may be seized by the government if there are any unpaid debts regarding the business.

The sole proprietor vs single-member LLC arrangements are established differently—forming a sole proprietorship is more straightforward than creating an SMLLC. To form a sole proprietorship, you simply need to obtain a business permit and register the company’s official name. An SMLLC requires you to file an Articles of Organization document, hire the right registered agent, obtain a business permit, and register the trade name.

Is a single-member LLC the same as a sole proprietorship in terms of fees? Unfortunately, the pricing of each structure differs. Establishing an LLC requires more paperwork, money, and effort. Moreover, there is a filing fee for setting up an SMLLC, which varies from state to state.

Sole proprietors, however, are not charged a filing fee, have less paperwork, and are a less complex structure to start. But your money or assets are not protected.

NOTE: If the owner of an SMLLC dies and the company is not passed on to another member, the company dies as well.

Key Takeaways

An SMLLC is a Limited Liability Company that has only one owner.
An SMLLC is considered a disregarded entity.
Such Limited Liability Companies can be taxed as a sole proprietorship, C-corp, or S corporation.
Establishing an SMLLC requires more paperwork than a sole proprietorship.

Single-Member vs Multi-Member LLC

One of the first challenges when forming a limited liability company is to decide whether you wish to create the company by yourself or with others, distinguishing between a single-member LLC(SMLLC) and a multi-member limited liability company (MMLLC). The primary difference between an SMLLC and a multi-member LLC is that the SMLLC has one owner who has complete control of the company, and the other has two or more owners who share control over the company.

Another difference between the two is the taxation process—SMLLCs are considered sole proprietorships for tax purposes, while MMLLCs are taxed as partnerships.

A common question when considering forming an SMLLC is doing a single-member LLC needs an EIN. Since an SMLLC is treated as a disregarded entity, it doesn’t need to have employees and, therefore, doesn’t have excise tax liability—so there’s no need for an EIN. They only need a personal tax ID. But because multi-member LLCs need employees, they must obtain an EIN, regardless of being treated as a corporation or partnership.

Note the single-member LLC pros and cons and the pros and cons of a multi-member LLC:

Single-Member Liability Company vs Multi-Member Liability Company

PROS CONS PROS CONS
Ability to bring in new members. Requires periodical renewals. No limit to how many owners a company has. Owners cannot be employees of the company unless they change their working status.
Pass ownership to others at any time. Requires more paperwork to form one. Members don’t need to be US citizens. If one owner does something illegal, the others suffer the consequences.
Flexible federal income—choose for LLC to be taxed either as proprietorship or corporation. Some owners contend that the SMLLC is not a separate entity and won’t give the owner’s liability protection in case of illegal activity. All members of a multi-member LLC have liability protection. Requires more paperwork when filing taxes.

Who Benefits From an SMLLC or Multi-Member LLC?

If you wish to have liability protection but at the same time deal with simple tax filing of a sole proprietorship, an SMLLC is a suitable choice for you and your business. Businesses that already have multiple owners tend to form a multi-member LLC because of its liability protection.

NOTE: A multi-member LLC requires registration in your home state.

 

Conclusion

Is a single-member LLC worth It? This variation of an LLC is popular for a reason—not only does it offer liability protection, but it’s also simple to maintain. This article has endeavored to present a clear picture of what a single-member LLC is, how it’s taxed, and how to distinguish it from a sole proprietorship and multi-member LLC. Whether you’re a sole proprietor or an established business owner, an SMLLC is an excellent choice.

FAQ

What is the difference between an LLC and a single-member LLC?

The main difference between an LLC and an SMLLC is that an SMLLC has only one owner who has complete control over the company, whereas an LLC can have more than one owner (a multi-member LLC).

Is a single-member LLC the same as a sole proprietorship?

No. They are similar but also quite different. The owner of an SMLLC is legally separated from the company, whereas the owner of a sole proprietorship is regarded as the same as the company.

Do I need an operating agreement for a single-member LLC?

An operating agreement is optional but recommended—except for California, which requires an operating agreement. But an Articles of Organization document is necessary to form an SMLLC.

Can a single-member LLC have employees?

A single-member LLC can hire employees—make sure you withhold payroll taxes (unemployment insurance, medicare, social security) and pay these to the IRS.

ABOUT AUTHOR

I’m an entrepreneur by profession and an artist by passion. I do business to pay the bills and make music to bring the thrills. Thanks to a bachelor in Business Administration, I'm well-versed in all things business. Owning a construction company certainly helps, too, but it also brings out my love for building and home protection.

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