How to Start a Single-Member LLC? (In-Depth Guide)
Forming a single-member LLC reduces personal liability and offers tax advantages, separating personal and business assets and allowing self-employment tax payments through its status as a disregarded entity.
As a seasoned business specialist, I've handled numerous clients and addressed their concerns regarding all aspects of an LLC.
After consulting legal experts in the field of business, I'll provide an in-depth guide on starting your own single-member LLC.
Quick Summary
- To start a single-member LLC, you need to choose a business name, file the required documents, hire a registered agent, obtain an Employer Identification Number, and register your LLC with the state.
- It's essential to hire a registered agent and open a business bank account to maintain the LLC's legal and financial separation from personal assets.
- The data from Big Ideas for Small Businesses reveals a compelling trend towards single-member LLCs, with filings skyrocketing to 2.8 million in 2020, demonstrating the structure's appeal and potential benefits for individual business owners.
- In my experience, the simplicity and protective structure of a single-member LLC make it an unbeatable choice for solo entrepreneurs seeking legal security and tax efficiency.
How to Form a Single-Member LLC?
To form a single-member LLC, follow state requirements and file the necessary documents. The process involves the following steps:
Step 1: Choose a Suitable Business Name
Conduct a business name search to determine if your preferred LLC title is available.
Step 2: File the Required Documents
File the Articles of Organization with the Secretary of State office and draft an operating agreement.
Step 3: Consider Hiring a Registered Agent
You may want to consider hiring an LLC registered agent to receive important legal documents on your behalf (such as service of process).
You can also hire an accountant or lawyer to handle legal matters.
Step 4: Obtain an Employer Identification Number (EIN)
Obtain an LLC Employer Identification Number (EIN) by filing Form SS-4 with the IRS.
Although it is not required, it is advisable to apply for one to open a business bank account and maintain limited liability protection.
Step 5: Open a Business Bank Account
Open an LLC business bank account in the name of the SMLLC to separate business funds from your assets.
Step 6: Register Your Single-Member LLC
Determine the cost and timeline for forming your SMLLC. Typically, the filing fee is $100 or less, and the process takes 3-6 weeks.
If you want to speed up the process, you may want to discuss it with a service provider like ZenBusiness or a different professional.
Forming a Single-Member LLC: What You Need to Know
Forming a single-member LLC has special considerations since it is not regarded as a typical limited liability company.
If you choose to form a SMLLC, you are not required to file any additional tax forms or pay annual fees.
However, if the LLC has income that it receives, this income becomes taxable to the single member, whether he or she draws it out as a salary or leaves it in the business entity.
A SMLLC is not required to have an Employer Identification Number (EIN), but it is advisable to obtain one for legal transactions. You may need one to open a bank account or secure a loan.
An LLC operating agreement may seem unnecessary since there is only one member, but there are advantages to drafting one.
However, the document outlines key information, including the purpose, operations, and management, about the LLC and keeps the business on track. It could be used to protect your company if any legal issues arise.
You can act as your own registered agent for your SMLLC. You will need to provide a service of process and correspond with legal agencies and clients.
Benefits of Forming a Single-Member LLC
If the LLC is owned by just one individual, forming a single-member LLC, also known as a "disregarded entity," is often the preferred option.
Single-member LLCs (SMLLCs) have become increasingly popular, as demonstrated by the fact that one-owner LLCs now represent 9.8% of all Schedule C filers, a significant increase from only 2.3% in 2001.
Benefits of establishing an SMLLC include:
- Credibility
A SMLLC establishes credibility compared to a sole proprietorship since an SMLLC is categorized as a company. The formation, legality, and structure are created professionally.
- Lower Fees
Because there is no requirement to file an LLC annual report, an SMLLC will likely cost less than other LLCs to maintain each year.
- Privacy
Single-member LLCs can protect their members' assets from business lawsuits and claims because they do not have to disclose the member's assets to the public.
"To be successful you have to have your heart in your business and your business in your heart."
-Thomas J. Watson, Chairman and CEO of IBM
How Is a Single-Member LLC Taxed?
A sole proprietorship LLC is subject to LLC pass-through taxation. If you are a U.S. taxpayer, forming an SMLLC will grant you the ability to choose how your business entity is taxed for federal purposes.
Single-member LLCs are treated as disregarded entities for federal income tax purposes, which means the entity does not file its own taxes [1]. At the same time, it can still be classified as a C or S corporation.
This means that business taxes are treated as personal taxes, and the owner of a single-member LLC must pay taxes on any income that is left in or taken out of the business.
FAQs
Why Should I Choose A Single-Member LLC Over Other Business Structures?
You should choose a single-member LLC over other business structures because a limited liability company offers personal asset protection and has tax benefits.
What Paperwork Will I Need to Complete to Form a Single-Member LLC?
The paperwork you will need to complete to form a Single Member LLC includes Articles of Organization, an Operating Agreement, and the necessary state requirements. Check with your business attorney or state official for more details.
Is My Single-Member LLC Considered a Separate Entity From Me?
Your single-member LLC is not considered a separate entity from you. That means that your LLC will be treated as a sole proprietorship for tax purposes, and all business income will flow directly to single-member LLC owners.
References:
- https://www.irs.gov/businesses/small-businesses-self-employed/single-member-limited-liability-companies
