What Is a Single Member LLC, and Why Should I Consider Creating One?

A single-member limited liability company (SMLLC) may offer your small business advantages over a sole proprietorship, including enhanced liability protection and flexible tax options. This article will explain what a single-member LLC is, the benefits it can provide like shielding personal assets from business liabilities, the option of pass-through or corporate taxation, and a comparison between SMLLCs and sole proprietorships.

Understanding these advantages can help you decide if an SMLLC is right for your business, whether you're a freelancer, consultant, or real estate agent.

What is a Single Member LLC?

A single-member limited liability company (SMLLC) is formed with one owner or member. The owner can be the manager if the SMLLC is member-managed, or the owner can make the SMLLC manager-managed and appoint a professional manager to manage the company or assist them with the management of the company.

Key Characteristics of a Single-Member LLC

Entrepreneurs often choose between starting their business in their own name without forming a business entity or creating a single-member LLC. When an entrepreneur starts a business without forming a legal entity, it is called a sole proprietorship. When deciding between the two, several vital characteristics could make an SMLLC a more appealing option, like offering limited liability protection, pass-through taxation, and flexible management.

Limited Liability Protection

Unlike in a sole proprietorship, setting up your company as a single-member LLC creates a distinction between the owner’s personal assets, which are not exposed to business liability, and business assets, which are at risk and exposed to business liability. That means that the owner can decide how much of their personal assets they want to risk on the business and protect their other assets from business liability. Whether the company experiences profits, losses, or legal issues, access to the owner’s personal assets is limited and cannot be leveraged or used to satisfy claims against the company.

Pass-Through Taxation

Unless the SMLLC submits an IRS Form 8832 to declare its choice to be taxed as a C-corp or IRS Form 2553 to declare its choice to be taxed as an S-corp, the IRS will tax an SMLLC as a “disregarded” or “pass-through” entity – the same as a sole proprietorship.

This means that the owner of the LLC must report the business’s profits and losses to the IRS using Schedule C on Form 1040 on the owner’s personal taxes. As the owner, you would pay self-employment taxes, including Social Security and Medicare, on all taxable income from the business, either quarterly or annually. Any additional fees, including franchise fees, would also be applied to the owner’s taxes.

We will discuss taxation for single-member LLCs in more detail below.

Flexibility of Management

Single-member LLCs offer exceptional operational flexibility because they are exempt from many formalities required by other business structures. In many states they are not legally required to have a board of directors, hold regular formal meetings, or adhere to detailed record-keeping requirements. This flexibility enables greater responsiveness and agility, allowing businesses to adapt swiftly to changing priorities. However, the lack of a legal requirement to hold meetings or keep detailed records can undermine the SMLLC’s asset protection and lead to the owner being held personally responsible for business liability. Even if not legally required, we recommend SMLLCs hold meetings and keep detailed records.

10 Steps to Forming a Single-Member LLC

Establishing an SMLLC is a straightforward process. However, it’s wise to review the steps to setting up your single-member LLC in advance so that you can gather the information you’ll need to complete your registration process efficiently.

Step One: Choose a Business Name

Like any business, a single-member LLC must register its name with the IRS and the Secretary of State’s office. You’ll use this company name in association with all tax and legal requirements. Even if you operate your business with a DBA, you must still register your SMLLC with an official business name.

Step Two: Apply For and Obtain an EIN

As of January 1, 2024, all LLCs must obtain an employer identification number (EIN) regardless of whether or not they hire employees. Obtaining an EIN from the IRS is a free service. Learn everything you need to know about EINs.

With the recent introduction of the Corporate Transparency Act (CTA), LLC reporting requirements have changed.

1. If you have an existing LLC, you must complete your first beneficial ownership information (BOI) report by January 1, 2025.
2. If your entity was created or registered in 2024, you have 90 days from its inception to file your company’s first reports.
3. If you’ve already filed a report but need to update it, you have 30 days to make any changes required by the CTA.

Our step-by-step EIN Walkthrough Guide can help simplify the process of applying for and obtaining an EIN.

Step Three: Appoint a Registered Agent

All LLCs are required to appoint a registered agent. A registered agent’s primary role is to accept all critical legal and government notices that might be delivered by mail, email, or in person, distribute that information to the correct parties, and provide notices and reminders of critical milestone dates to the owners of the business.

While eligibility requirements to serve as a registered agent vary by state, all states share a minimum of several requirements.

Step Four: File Articles of Organization With the State

Whether your state calls it “Articles of Organization,” “Certificate of Organization,” or “Certificate of Formation,” you are required to obtain and file this document to legally register your LLC in the state where you do business.

The information needed for this document and the fee for filing it will vary by state. You can confirm this by contacting the offices of your Secretary of State.

Correctly submitting this information is essential to avoid delays in processing.

Step Five: Submit Entity Classification Election Form

Unless you file the necessary documentation, the IRS will provide your SMLLC with the same tax treatment as a sole proprietorship.

To change the automatic taxation status the IRS assigns to single-member LLCs, owners must complete and file IRS Form 8832. Doing so will allow you to elect for your LLC to be taxed as a C-corp instead of a disregarded entity.

To have your LLC treated as an S-Corp, you must complete and file IRS Form 2553 instead of IRS Form 8832.

Step Six: Create an Operating Agreement

An Operating Agreement, though not mandatory across states, offers substantial benefits for your LLC. It outlines operational procedures, member responsibilities, profit distribution, dispute resolution methods, member exit procedures, and guidelines for company dissolution.

Early creation of an Operating Agreement creates structure, prepares for expansion, and reinforces limited liability by distinguishing the owner from the business.

Step Seven: Open a Business Bank Account

Designating your business as an LLC creates a separate legal entity that can enter contracts, buy and sell goods and services, establish credit, and take on debt. This separation protects members’ personal assets if the business is sued, focusing solely on the business's assets and liabilities. This is known as “the corporate veil.” But, if not appropriately protected, “the corporate veil” can be pierced.

One of the most important ways of maintaining “the corporate veil” that separates members’ personal assets from the business is by establishing and using separate business bank accounts and credit cards.

Step Eight: Obtain Necessary Business Licenses and Permits

The business licenses and permits you’ll need will depend on what business activities you perform and where you perform them. If you operate your business in multiple states, you might need different licenses and permits for each state.

We recommend consulting with the Secretary of State offices, counties, and municipalities where you conduct business to determine the licenses and permits your LLC needs.

Step Nine: Abide by Hiring and Employment Laws

While your SMLLC might include just one individual, if you have or intend to have employees, your LLC must follow employment-related rules and regulations, including submitting the mandatory reports at federal, state, and even local levels.

Step Ten: Remain in Good Standing

Setting up your SMLLC is an excellent start to building your business, but maintaining good standing is critical to its success.

Though there is a lot of managerial flexibility in single-member LLCs, you will still have some compliance responsibilities on an ongoing basis. One of the best ways to manage these requirements and ensure you’re always on top of important milestones, dates, and deadlines is by appointing a registered agent whose sole responsibility is taking care of these items on your behalf.

Advantages of a Single-Member LLC

We’ve already covered the key benefits of single-member LLCs, including liability protection for personal assets and using pass-through taxation through your individual income tax return versus electing to be classified as a C-corporation.

But, there are a few more benefits most business owners overlook:

1. Simplicity of formation: With fewer restrictions and reporting requirements than other more complex business structures, forming a single-member LLC is considered one of the simplest business entities to form.
2. Ownership Changes: The LLC's status as a separate entity means selling the company or bringing on new partners is straightforward.

Disadvantages of a Single-Member LLC

On the other hand, there could be some disadvantages to starting your business as a single-member LLC.

1. Personal vs. Corporate Tax Rates: Failing to file IRS Form 8832 to be taxed as a C-corp, your LLC will be treated like a sole proprietorship, with profits reported on your personal tax return via tax Form 1040 Schedule C. Personal income tax rates are often higher than corporate tax rates.
2. Credibility: Though forming a corporation can be unnecessarily complex if you intend to keep your business small, single-member LLCs may be seen as less credible than corporations.
3. Limited Personal Liability Protection: In some cases, owners of single-member LLCs might still be held personally responsible, risking personal finances and property if the "corporate veil" is pierced. Cases in which this could happen include:
   • If they have committed fraud
   • If they are involved in illegal business activities
   • If they have compromised the line of separation between the business and personal transactions
   • If they have violated the terms of its Operating Agreement
   • If they have fallen out of good standing by neglecting to submit necessary compliance filings

Single-Member LLC vs. Sole Proprietorship – Which Option Is Best for You?

An SMLLC differs from a sole proprietorship, each with its pros and cons. While setting up as a sole proprietor may seem like the simplest solution, weighing the benefits and disadvantages will help you determine the best structure for your business.

Taxation of a Single-Member LLC

A single-member LLC is a separate legal entity; however, for federal tax purposes, the IRS will automatically consider it a disregarded entity and not treat it as a separate entity from its owner at tax time.

However, corporate taxation strategies will be applied if you elect for your LLC to be taxed as a corporation. Which tax strategy is best for your single-member LLC?

When would I choose pass-through taxation?

Unlike corporations, which can subject profits to taxation at the corporation level and then again if the profits are paid to shareholders as a dividend , disregarded entities avoid double taxation by passing all income through to the owner’s personal tax return. The owner will then pay self-employment and income taxes based on the owner's bracket.

Pass-through taxation is the default tax classification applied to single-member LLCs, subjecting them to self-employment tax (a flat rate) and income tax (variable by the owner's bracket). This approach offers deductions on personal taxes and allows business losses to offset taxable income by reporting all income and losses and listing business income and deductible expenses on Schedule C of your personal tax return IRS Form 1040.

If the owner's individual tax rate is lower than the corporate tax rate, this strategy can also lower their overall tax burden, potentially at both state and local levels.

When would I choose to be taxed as a corporation?

A single-member LLC might choose a C-corp tax classification when the LLC generates more net income than the owner needs to support their lifestyle. The excess income can be taxed at the C-Corp level and then held by the C-Corp as retained earnings. This will allow the owner to minimize their personal Social Security and Medicare tax liability and allow the C-Corp to reinvest the retained earnings in the company . In this case, owners who work inside the business are added to the payroll and would pay Social Security and Medicare taxes only on their wages and salaries.

Forming an LLC and then electing to be classified as C-corp is straightforward and avoids the formalities of more complex corporate structures, such as requiring a board of directors or bylaws.

Legal and Compliance Requirements

As we outlined, single-member LLCs generally are not required to have boards of directors, bylaws, or member meetings, but they do have other compliance requirements that could include:

• Paying taxes and fees
• Annual reporting
• Renewing licenses and permits
• Retaining critical company records such as your company’s Articles of Organization, Operating Agreement, tax returns, bank statements, and more
• State-specific regulations

Of course, requirements could vary by state. Non-compliance could result in fines, lawsuits, or even suspension of the business.

Common Uses for a Single-Member LLC

While many one-person businesses start as sole proprietors, several industries benefit from forming single-member LLCs. These include businesses focused on the following:

• Real estate investment
• Consulting
• Freelancing

Surprisingly, about 80% of freelancers operate as sole proprietors due to its simplicity and lack of paperwork. However, sole proprietorships offer minimal protections to the business owner. Although setting up a single-member LLC requires more effort, the ability to separate personal assets from business dealings can make it worthwhile.

Industries and businesses That Cannot Form a Single-Member LLC

While all states permit the formation of a single-member LLC, in many states, certain professions have additional requirements or are restricted from forming a single-member LLC.

Some industries that are not permitted to form SMLLCs include:

• Accounting
• Architecture
• Banks
• Engineering
• Insurance
• Law
• Medicine

Is a Single-Member LLC Right for Your Business?

A single-member LLC can be a valuable business structure for entrepreneurs seeking enhanced liability protection and flexible tax options. Separating personal assets from business liabilities and offering the choice between pass-through or corporate taxation caters to many small business needs, from freelancers to consultants and more. However, there are potential drawbacks, including administrative requirements and risks if legal formalities aren't maintained.

Understanding these nuances is crucial for anyone considering this business entity, ensuring informed decisions that align with long-term business goals and legal compliance.