Limited liability companies (LLCs) are a business structure in the United States. In this business structure, the owners are not personally liable for the company's debts or liabilities. This provides personal protection for all members involved.
Limited liability companies are hybrid entities. They combine both characteristics of a corporation as well as those of a partnership or sole proprietorship. In some cases, there are multiple owners (known as members), but there are also LLCs that are formed with only one member, known as a single-member LLC.
Single member LLCs are the same as any other LLC. The only difference is that a single member LLC is a limited liability company that only has one member. Under current IRS rules, single member LLCs can elect to be treated as a corporation. Otherwise, they are automatically disregarded for Federal income tax purposes.
There are several advantages of starting a single member LLC. They are easy to create and operate, especially compared to multi-member LLCs because there is only one member making all of the decisions.
Here are 5 additional benefits of forming a single member LLC.
Single member LLCs are formed in the same way as any other LLC. The only difference in regards to the number of owners. When forming an LLC some states may require the articles of incorporation to mention how many members are within the LLC. Despite this, it will usually make the operating agreement simpler. Outside of these changes when forming a single member LLC, it is essentially the same process as a standard LLC.
By default, a single member LLC is taxed as a disregarded entity. There are choices though when it comes to taxation. Single member LLCs are able to elect either C-corp or S-Corp status through an additional filing with the IRS. The main difference in taxation is that single member LLCs cannot be taxed as a partnership because it would require more than one member.
Single member LLCs owners are responsible to pay 3 different types of taxes. It is important to remember that taxes vary state to state so make sure to check with your business attorney to ensure you don’t make any mistakes.
State income tax: In general, state income taxes will change from state to state. Some states do not even have income taxes.
An EIN is an employee identification number. This is similar to a social security number for your business. Single-member LLCs need an Employer ID Number, regardless of whether or not you have employees. This is because most banks require an EIN to open a business bank account. When a single member LLC is taxed as a disregarded entity, it should use its personal tax ID (social security number) rather than an EIN. This will be used when completing a W-9 form.
If you run a small business with little liability and minimal profit, then you may not need to form a single member LLC. As a sole proprietor, forming a single member LLC can provide you with limited liability protection, and will make you appear as a legitimate business. You will also be able to obtain funding more easily and protect your personal assets. Forming a single member LLC is often worth it as long as you are running a legitimate business that is more than a side hustle.