A single-member LLC (SMLLC) is a Limited Liability Company with one owner.
A single-member LLC is treated as a disregarded entity for tax purposes, which means the entity does not file its own taxes. Want to know if a single-member LLC is the perfect business entity for you? Read on to learn more.
4 Benefits of Forming a Single-Member LLC
If the LLC has only one owner, you will likely want to form a single-member or "disregarded entity." Here are four benefits of forming a single-member LLC:
1. Simplicity
The IRS does not require single-member LLCs to file annual reports, pay an annual tax, make tax elections, or file partnership returns.
2. 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.
3. Privacy
Single-member LLCs are able to protect their members' personal assets from business lawsuits and claims because they do not have to disclose the member's personal assets to the public.
4. Federal Tax Treatment
If you are a U.S. taxpayer, forming a single-member LLC will grant you the ability to choose how your business entity is taxed for federal purposes (i.e., sole proprietorship or pass-through taxation).
Single-member LLCs are treated as disregarded entities for federal tax purposes, which means the entity does not file its own taxes.
The "disregarded entity" tax status means the IRS treats the Limited Liability Company as if it does not exist for tax purposes.
If you do not have to file taxes for your business, then there are no annual fees required to maintain your LLC's status with the state.
For income tax purposes, all income or loss from a single-member LLC flows directly from the single member to his or her individual tax return.
Forming a Single-Member LLC: What You Need to Know
If you choose to form a single-member LLC, 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 salary or leaves it in the business.
Additionally, there are state-level requirements, which vary by state. For example, some states will require a filing of Articles of Organization with the Secretary of State.
How to Form a Single-Member LLC?
A single-member limited liability company (SMLLC) is an unincorporated business with only one owner. The owner of the SMLLC must be a natural person, meaning that it cannot be another business or corporation.
There are no limits on the activities of an SMLLC. However, because the SMLLC is not a separate entity, any debts or liabilities of the business remain the responsibility of the owner.
You must first conduct a business name search in order to select the proper business name.
Then you should file the appropriate documents such as the Articles of Organization with the Secretary of State office in the state where you will conduct business activities to form an SMLLC.
While it is not mandatory, you may want to consider hiring a registered agent to receive important legal documents on your behalf (such as service of process).
You can also hire an accountant or lawyer who can act on your behalf with regard to state filings and tax obligations.
Keep in mind that if the SMLLC has any income or losses, it must report these to you and the IRS. Also, if the SMLLC is being sued, you may be held personally liable for any damages assessed against it.
Once your SMLLC is registered with your state, you will need to obtain an Employer Identification Number (EIN). You can do this by filing Form SS-4 with the IRS. You must also open a business bank account for the SMLLC.
After knowing how to set up your SMLLC, you'll want to know how much it will cost and how long it will take. Generally, the filing fee should cost $100 or less and take between 3-6 weeks for the process.
If you want to speed up the process, you may want to discuss it with a service provider like ZenBusiness or a different professional.
How Is a Single-Member LLC Taxed?
Because a single-member LLC is not considered an entity separate from its owner, any income or loss belongs to the single-member, and it flows directly onto the owner's tax return; in other words, business owners must pay self-employment tax.
Additionally, because a single-member LLC is disregarded for federal income tax purposes, SMLLCs are subject to pass-through taxation.
This means that business taxes are treated as personal taxes, and the owner of an SMLLC must pay taxes on any income that is left in or taken out of the business.
FAQs
What’s Different About LLCs? Why Should I Choose One Over Other Business Structures?
An LLC (limited liability company) is a business structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a sole proprietorship or partnership.
LLCs are popular because they protect you from being personally liable for business debts, but they're relatively easy to form.
What Paperwork Will I Need to Complete to Form an LLC?
In most states, you can form an LLC by filing articles of organization with the secretary of state.
Some states require a more detailed filing that includes your company name and purpose, as well as other information. Check with your business attorney or state official for more details.
Does a Single-Member LLC Need a New EIN?
If you are the sole owner of your LLC, then yes. You will need to apply for an EIN with the IRS so that you can open a business bank account in your company's name.
Is My New Single-Member LLC Considered a Separate Entity From Me?
No. A single-member LLC is disregarded as an entity separate from its owner hence providing personal liability for tax purposes.
That means that your LLC will be treated as a sole proprietorship for tax purposes, and all business income will flow directly to you, the Limited Liability Company owner.
Is Forming a Single Member LLC the Best Option for You?
Since an SMLLC is disregarded for tax purposes, all business income or loss will flow directly to the owner or "member."
If you live in a state that imposes a state income tax, then you may be responsible for paying your state's individual income taxes on your share of the LLC's earnings.
Otherwise, you'll simply include any income or loss on your personal tax return.
If you live in a state that does not collect income tax, then you may benefit from not having to file an informational return at the end of the year since there is usually no requirement for filing this form if there is no state tax due.
In general, most accountants recommend the SMLLC structure when the business owner only anticipates having one income source since it can simplify tax preparation.
The SMLLC is also useful if you want to create an LLC for estate planning purposes in order to separate your assets from those of your business.
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