As a one-man (or woman) show running a business, you can handle just about anything.
Being in complete control of your business is both rewarding and challenging.
For individuals who are on their own running their business, is forming a single-member LLC worth it? What’s the difference between an LLC and a single-member LLC?
Let us help clear the air and get you on the path to forming a business entity that is right for you.
What is an LLC?
A limited liability company (LLC) is a business structure in the United States whereby the owners are not personally liable for the company's debts or liabilities. Limited liability companies are hybrid entities that combine the characteristics of a corporation with those of a partnership or sole proprietorship.
What is a Single Member LLC?
A single member LLC (SMLLC) is simply a limited liability company that has only one member. Under current IRS rules, unless the single member LLC elects to be treated as a corporation, it is disregarded for Federal income tax purposes.
Unlike sole proprietorships, LLCs file paperwork with the state and pay registration fees every year. Unlike corporations, LLCs don’t issue stock or keep formal meeting records. A single-member LLC could easily be the balance between the two entities that you need.
How to Form a Single Member LLC
A single-member LLC is a limited liability company with a single owner, and LLCs refer to owners as members.
To form a single-member LLC, go to the business division section of the state's department of state to obtain information on the process. This will also include detail about filing the Articles of Organization and paying a filing fee. After filing a state business registration, it’s smart to prepare an Operating Agreement to have in writing how you plan to run the business.
In Texas, it is easy to form a Single Member LLC. It can be done in 6 simple steps.
- Choose a name for your LLC
- File Articles of Organization.
- Choose a registered agent
- Create an LLC operating agreement
- Comply with other tax and regulatory requirements
- File annual reports
Although the process of forming a single member LLC in Texas is easy. It can be overwhelming to handle paperwork and submit it all on time. Hiring a business attorney can make it easier to draft and file documents.
Make sure your single member LLC get approved by the state with the help of an experienced business attorney.
Benefits of a Single Member LLC
There are several legal and financial benefits to forming a single member LLC. Here are the top 3 features of SMLLCs that Texas business owners find most beneficial.
Separate business entity – The business is known as a legitimate business and you can keep your personal life to the side.
Legitimate business – When you have an LLC attached to a business – rather than just your name – people tend to respect you more. This helps garner respect, retain clients, and grow your business.
Taxation - In a single-member LLC, the owner pays taxes on their personal income tax return as if they were a sole proprietor. This saves time and money, plus you get the benefits of a corporation without the corporate taxes.
How are Single Member LLCs Taxed in Texas?
Single-member LLCs are subject to several different kinds of federal and state taxes as a business entity.
The IRS treats one-member LLCs as sole proprietorships for tax purposes. This means that the LLC itself does not pay taxes and does not have to file a return with the IRS.
As the one and only owner of the LLC, you’ll report business income and expenses on Form 1040, Schedule C. As explained by CPAs, “If, after deducting business expenses, the LLC generates a profit for the year, the owner will owe taxes to the IRS in accordance with their personal income tax rate.” They also explain that if the LLC operates at a loss for the year, you can deduct the business’s losses from your personal income.
In a nutshell, when it comes to federal income tax, a single-member LLC reports business income taxes on a Schedule C. Single-member LLC owner are considered self-employed, therefore must pay the self-employed taxes.
Single Member LLC Employer Identification Numbers
An employer identification number (EIN) is a unique nine-digit number assigned to business by the IRS – almost like a Social Security Number. As stated by the IRS, every business entity must have an EIN, even if they have no employees.
By default, the IRS treats single-member LLCs as sole proprietorships. This means that a single-member LLC would NOT need an EIN is if it is a disregarded entity with no employees and doesn’t have an excise tax liability.
Single-member LLCs, like most business entities, would need an EIN to open a business bank account, hire employees, file taxes, sell certain products, and much more.
Choosing your business structure is not a decision to be taken lightly. Although changes can always be made further down the road, it’s important to get everything right the first time to avoid mistakes and mishaps. Consider consulting with a business attorney to determine the best structure for your business.
AUTHOR
Brandi L. Joffrion, Esq.
Brandi Joffrion is a skilled attorney with extensive experience in diverse areas including litigation, estate planning, and creating limited liability companies and corporations. She is also a professor and former offshore anti-money laundering compliance officer. Brandi can provide you with particular advice on your specific situation in the areas listed above. Brandi is licensed to practice law in Colorado.
