Single Member LLCs: A Complete Guide

  • Accracy
  • 26th Nov, 2023

The first thing an entrepreneur must do is choose a structure for their business. If you want the liability protection of an LLC, but with simple tax filing like a sole proprietorship, then a single member LLC could be the right structure for you.

Single Member LLCs: A Complete Guide
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What is a single member LLC?

A single member limited liability company (SMLLC) is an LLC with just one voting member—you, the LLC owner. Multi-member LLCs have multiple members, who vote on major decisions and share ownership of the company.

Whether they have a single owner or many, all LLCs come with liability protection. That means, if your company is sued, or can't pay its debts or federal tax, your personal assets—as opposed to the money in your business bank account—can't be seized.

When deciding whether a single member LLC is right for you, make sure to talk to your legal counsel for legal advice as the content provided is only meant to serve as general information.

The corporate veil

The protection an LLC gives you from liability is often referred to as the corporate veil—a kind of imaginary curtain dividing your personal assets and those of the business.

But the corporate veil has one weakness: you. To pierce the corporate veil means to mix your personal and business assets.

In the event you're sued or someone levies your assets, and you've pierced the corporate veil, a court may rule your liability protection null and void. That brings personal liability into effect—meaning your personal assets are on the line.

An SMLLC is not a sole proprietorship

Even if you elect to pay taxes like a sole proprietorship (more on that shortly), a single member LLC is not a sole proprietorship. Unlike a sole proprietorship, an SMLLC can:

  • Elect how it files taxes (as a pass-through entity or a corporation)
  • Bring on additional members
  • Protect members' assets from liability

That being said, an LLC structure may not be the best type of business entity for you; it's important to consider the pros and cons.

Further reading: Sole Proprietorship vs LLC (Main Differences)

The pros and cons of a single member LLC

Here's a short summary of the single member LLC business structure vs. sole proprietorships.

Pros Cons
Liability protection—an LLC is a separate legal entity Have to file lots of paperwork to form one (sole props form automatically, when you start doing business)
Ability to bring on new members Must submit compliance forms to prove you're following the rules and stay in good standing
Flexible federal income tax filing (choose to file as a sole prop or corporation) Must maintain corporate veil—piercing it puts your assets at risk
Can pass on ownership to others, eg. family members

How to form a single member LLC

In order to form a single member LLC, or convert your sole proprietorship to an SMLLC, you need to to the following:

  • Register a business name
  • Apply for an Employer Identification Number (EIN)
  • Designate a registered agent—the person who receives all tax correspondence
  • File articles of organization with your Secretary of State. The filing fee, business licenses, and the information you must provide varies state by state.
  • Open a business bank account
  • Stick to your state's compliance requirements—such as filing annual reports, paying state taxes, or submitting an operating agreement. (Requirements vary state by state)
  • Abide with all hiring laws, if you're an employer

If you're starting from scratch, our guide on how to start a small business has everything you need to know.

Paying business tax as a single member LLC

By default, your single member LLC is taxed as a sole proprietorship. In that case, the IRS treats your LLC as a disregarded entity. That means that, even though it's legally a separate entity from your person, you and your small business are one and the same for income tax purposes and file the same income tax return.

However, you can also elect to file using the rules for a C corporation or S corporation. Then you would need to complete a separate corporate income tax return.

Simply put, you have say in how your LLC is taxed and a tax professional can help you determine what's best for you. But we've broken down the basics for you.

Filing as a sole proprietor

How to elect: You're automatically treated as a sole proprietor if you don't elect another status.

How to file: Report all business income on Schedule C of your personal tax return (IRS Form 1040) using your social security number.

Filing as a C corporation

How to elect: File IRS Form 8832 to confirm your tax status

How to file: Report all business income on IRS Form 1120. That income will be taxed at the corporate rate.

Keep in mind—any dividends or salary you earn from your SMLLC will also be taxed as personal income on IRS Form 1040. For this reason, single member LLCs rarely elect to file as C corporations.

Suggested reading: C Corp vs. LLC: Which Is Better for Early-Stage Entrepreneurs?

Filing as an S corporation

How to elect: File IRS Form 2553

Report all business income on IRS Form 1120S.

An S corporation is a pass-through entity; you'll pay your personal tax rate on all business income.

Why bother filing as an S corporation? When you elect to file as an S corp, the IRS doesn't treat you as a self-employed individual. So you don't need to file self-employment tax like you normally would when filing as a sole prop.

How to pay yourself as a single member LLC

As a single member LLC, if you pay personal expenses directly with your business profits, you'll pierce the corporate veil. To maintain liability protection (and keep your bookkeeping organized), you need to pay yourself through distributions.

Single member LLC owners need to cut a check and record it on the books as an owner's draw. You don't need to apply payroll taxes to this draw, as you aren't an employee. But if you plan on filing taxes as a sole proprietorship, you'll need to pay self-employment tax to the IRS.

Hiring employees as a single member LLC

A single member LLC is able to hire and pay employees. As a business owner, you'll need to be sure you're withholding payroll taxes and paying them to the IRS. Payroll taxes include:

  • Unemployment insurance
  • Medicare
  • Social security

For a deeper dive, check out our guide to payroll taxes.

Further reading: How to Hire Employees: 11 Tips for a Great Hiring Process

Overall there are lots of considerations when deciding the right entity for you so make sure that you talk to your tax advisor to ensure that entity is right for you.

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