A single member LLC (SMLLC) is a legal entity with one member, or owner. It offers the advantages of a limited liability company (LLC), including the separation of the individual’s personal finances and business finances, along with limited liability. It can also be relatively simple and inexpensive to form. But there are potential pitfalls to watch out for.
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Single Member LLC vs. Sole Proprietor
A sole proprietorship is not a legal entity. There is no official separation between the owner’s personal finances and those of the business. While it is often fairly easy to begin doing business as a sole proprietor, it provides no legal protection. The owner will typically be legally and financially liable for business debts as well as any lawsuits that may arise from the business.
A single member limited liability company is similar in that you can be the sole owner of the business; however it is a legally recognized business structure and it can provide significant liability protection, provided the LLC is properly formed and maintained. The level of protection can vary by state, however.
Single Member LLC vs. LLC
An owner of an LLC is called a member. A single member LLC has one member (owner) while a multi-member LLC has multiple members. A member doesn’t have to be a person, though it can be. It can also be a corporation or even another LLC.
In that sense, a single member LLC is simple: you can be the only member and you don’t have to worry about other people trying to help run your business.
However, as attorney Garrett Sutton points out that in some states single member LLCs don’t have the same level of protection as multi-member LLCs. If one of your goals in forming a single member LLC is protecting your personal assets and avoiding personal liability for business debts, you should make sure to investigate the level of protection available in the state in which you form your LLC.
How to Form a Single Member LLC
There are several basic steps involved forming an LLC, including:
- Choose your LLC business name
- Get a registered agent (often optional, but recommended)
- File articles of organization with the Secretary of State (or similar agency)
- Create an operating agreement
- Get an EIN (may be optional, see below)
You can form an LLC yourself, but many entrepreneurs prefer to get help from a business formation company or an attorney.Company formation services can help you in a number of ways beyond just forming your LLC, especially when it comes time to pay taxes.
Of course, there may be other requirements to fully start your business properly, including getting any required business licenses and professional licenses. Business insurance is also a must for most small businesses.
Filing Requirements
You’ll form your LLC by filing articles of organization in the state in which your business is located, or in another state of your choosing. If you form it in another state you’ll need to also register your LLC as a foreign LLC in the state in which your business is located. State filing fees vary, ranging from a few dollars to several hundred dollars. Most states also require you file an annual report and pay an annual fee.
What a Single Member LLC Means for Taxes
Understand that single member LLC owners have choices when it comes to how the business will be taxed for federal income tax purposes.
The Internal Revenue Service considers a single member LLC as a disregarded entity for tax purposes, unless it files Form 8832 and elects to be treated as a corporation (including an S corporation). Although that may sound confusing, it’s pretty simple.
Unless you notify the IRS otherwise, your LLC will be treated as a “pass through” entity for federal tax purposes, which means income and expenses pass through on the owner’s personal tax returns. You’ll file Schedule C with your personal income tax return to report your business income and expenses. You’ll pay income taxes on your profit even if you keep that money in your business bank account. This is the simplest approach to business taxes for an LLC.
You can also choose to have your single member LLC be taxed as a corporation, as mentioned above by filing tax Form 8832. Some LLC owners choose to be taxed as an S Corp because they can pay themselves a salary and take additional money from the business as owner’s draw or distributions. This may save money on self-employment taxes. If you decide to take this approach, review IRS guidelines carefully or consult a tax professional. The IRS may penalize business owners who do not take a reasonable salary.
It’s a good idea to request an Employer Identification Number (EIN) for your LLC though it may not be required. (An EIN is a taxpayer identification number, similar to your social security number for your personal taxes.) Lenders will often request an EIN when you apply for financing. You can get an EIN for free from the IRS, and some incorporation services will include obtaining one in the services they provide.
Note that the IRS does point out that “for purposes of employment tax and certain excise taxes, an LLC with only one member is still considered a separate entity.”
What a Single Member LLC Means for Financing Options
Forming a business entity such as an LLC can be helpful when it comes to getting small business loans and financing. Here’s why:
- Some lenders will not lend to sole proprietors, but there are rarely restrictions specific to a single member LLC. In other words, you’ll likely have more lending options with a single member LLC than as a sole proprietor.
- An LLC will have a separate business bank account and many small business lenders require business bank statements to confirm revenues. If you have not opened a business checking account for your LLC, it’s imperative you do so immediately.
- It can be easy to build business credit as an LLC (see below).
A single member LLC is not the only type of business entity that can help your business qualify for financing, but overall it will be superior to a sole proprietorship.
Build Credit for a New Single Member LLC
You can build credit as an LLC fairly simply once your business is established. Simply get credit accounts that will be reported to your business credit reports and pay them on time. These may include vendor accounts, business credit cards and small business loans that report.
Over time, these credit references can help you build good business scores which can help you qualify for additional financing in the name of your business.Building your business credit scores is a great way to help you open up access to capital for your small business.
FAQs About Single Member LLCs
What can I write off as a single member LLC?
There are a number of items that a single member LLC can deduct from their taxes, such as:
– Home office rent or mortgage
– Mileage
– Monthly work-related utilities like cell phone bill and wifi
– Software licenses and subscriptions for tools you use
– Any licensing fees required for your industry
– Educational materials or seminars for your line of work
– Business cards or promotional materials
It’s a good idea to check with a tax professional or certified public accountant (CPA) to make sure you’re not missing any deductions.Should a single member LLC receive a 1099?
If you work as a single member LLC in a freelance or contract capacity for another company, they should send you a 1099 form for any money they pay you over $600 in a given year.
Can a single member LLC use an EIN on W-9?
When filling out a W-9 to work as a contractor or freelancer for another company, you can use either your EIN or Social Security number on the W-9. You may want to use the EIN to simplify taxes and keep your business and personal finances separate. If you wish to be taxed as a disregarded entity, you can use your Social Security number.
How does a single member LLC complete a W-9?
To fill out a W-9 form as a single member LLC, you can download a copy of the form from the IRS website. You fill in your name and business name on the first two lines, as well as your business address. Check the “Limited Liability Company” box under the business name if you’d like to be taxed as a corporation, using C (for C corporation) or S (for S corporation) next to the limited liability box. Write your EIN as your taxpayer identification number unless you’d like to be taxed as a disregarded entity, in which case, use your Social Security number. Then sign the form and date it.
What name goes on the 1099 for a single member LLC?
For a single member LLC, you should write your personal name on the first line and your business name on the second line of a 1099.
How do I know if an LLC needs a 1099?
Any business that pays a contractor more than $600 in a year will need to provide the contractor with a 1099 for tax purposes at the end of the year.
Can a single member LLC pay himself a W-2?
No, single member LLCs cannot pay themselves using a W-2 because the LLC will be taxed as a pass-through entity, meaning that they are taxed like a self-employed individual. You cannot deduct wages you pay yourself.
