So you’ve decided to take the plunge and start your own small business. Congratulations! One of the most important decisions you need to make before you start your new venture is to determine the best business structure.
There are a few options, including a sole proprietorship and an LLC, but for many small business owners, the best choice is a single-member LLC. It brings the liability protection of a corporation but the simplicity of a sole proprietorship, adding flexibility in how your business is taxed.
Ready to learn more? Read on to understand all about the benefits and steps to take in opening a single-member LLC.
What is a single-member LLC?
A single-member Limited Liability Corporation, or LLC, is a type of business that is owned and operated by one person. It sets up your business as a separate entity, so you won’t bear personal liability for any business debts you accrue. You also gain flexibility in choosing how your business will be taxed for federal income tax purposes — either as a sole proprietorship, or as a corporation.
The benefits of forming a single-member LLC for your small business
Many small business owners think that a single-member LLC is too grand to be a good fit for their business. But that would be a mistake. Forming a single-member LLC provides many benefits which can make a big difference to your small business’ success.
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Limited personal liability
A single-member LLC separates your personal assets from your business debts and liabilities. This means that if your business faces legal or financial trouble, your home, vehicles, and savings are protected. If things go wrong and someone decides to sue you, your business would be the one named in the lawsuit rather than you personally.
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Tax flexibility
Single-member LLCs are taxed as sole proprietorships by default, so you report business income and losses on your personal tax return. However, you can elect to have your single-member LLC taxed as a corporation. This allows you to take advantage of lower corporate tax rates. You can switch back to sole proprietor taxation in the future if needed.
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Business Credibility
Establishing a single-member LLC gives your business a legal identity separate from you as the owner. This allows you to open business bank accounts, apply for business loans and lines of credit, and enter into business contracts in your company’s name. It also makes you appear more professional when applying for loans or making partnerships with other businesses.
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Less paperwork
Unlike corporations, single-member LLCs have minimal formation requirements and very little ongoing paperwork. You don’t have to elect directors or hold annual shareholder meetings. You only need to file a short-form tax return and annual report to maintain your LLC.
How to establish a single-member LLC
Now you’re convinced about the benefits of forming a single-member LLC, it’s time to discuss what’s involved. Here are the steps you need to take to form your single-member LLC.
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Get a physical address in the state where you want to register your single-member LLC.
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Choose a name for your business and check if it’s available in your state. You’ll want a name that reflects your occupation and is unique from other LLCs in your state.
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Designate a registered agent to receive legal notices on your behalf. Many business owners serve as their own registered agent to save costs.
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File articles of organization with your state, along with a filing fee that’s usually a few hundred dollars. Depending on your state and the type of business, you may also need certain business licenses or permits.
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Create an operating agreement. While not legally required, an operating agreement outlines the ownership, structure, and rules of your business, and helps prove your single member LLC should be a separate entity..
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Obtain an employer identification number (EIN) from the IRS. An EIN is like a social security number for your business. You’ll need it to open a business bank account and file your LLC’s tax return.
Once you’ve established your business as a single-member LLC, you’ll still need to keep up with certain ongoing obligations. These include renewing business licenses and filing annual reports and income tax returns. You’ll also need to comply with regulations for employers if you plan to hire any employees.
Creating an operating agreement for your single-member LLC
You aren’t legally required to create an operating agreement to have a single-member LLC, but it is highly recommended. It helps convince the authorities that your business should be considered a separate legal entity, and makes you appear more professional.
An operating agreement outlines how your single-member limited liability company will be run. Even though you’re the only member, an operating agreement is still important. It provides a framework for keeping your business affairs separate from your personal affairs, and establishes ethical business management processes.
Your operating agreement can be simple, but it should include details like:
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What type of business you’re operating
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How business decisions will be made
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How profits and losses will be distributed
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Who owns the business
It’s essentially a contract between the members of an LLC, even if you’re the only member.
Filing taxes for your single-member LLC
As a single-member LLC, it’s up to you to choose how you’ll be taxed. Most single-member LLCs are taxed as sole proprietorships, so the business income and losses are reported on your personal tax return. However, you can elect for your single-member LLC to be taxed as a corporation.
Remember, you are responsible for ensuring your business meets all tax obligations. Keep good records of income, expenses, profits and losses to properly report on your tax returns. You may want to work with an accountant, at least when first forming your single member limited liability company. They can help you determine the best tax classification for your business and make sure you stay compliant.
Taxes as a sole proprietorship
If taxed as a sole proprietorship, you report the LLC’s income and losses on Schedule C of your personal tax return, Form 1040. Your LLC is not required to file a separate tax return or obtain an employer identification number (EIN). You’ll use your social security number for tax purposes.
Taxes as a corporation
If you elect for your single-member LLC to be taxed as a corporation, your LLC must obtain an EIN and file a separate tax return. Your LLC will pay taxes at the corporate tax rates. You’ll have to file Form 1120 for the LLC and pay quarterly estimated taxes. Electing corporate tax status is more complicated, but it can have tax benefits in some cases.
Some other things to keep in mind:
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You may need to register with your state for sales tax if you sell taxable goods or services.
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Make sure to issue 1099 forms to any independent contractors you hire.
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Keep your business funds separate from your personal funds. Open a business bank account to avoid commingling funds.
A single-member LLC can be the best option for small business owners
By electing to form a single-member LLC, you get the best of both worlds – the simplicity of a sole proprietorship with the liability protection of a corporation. For most small business owners, a single-member LLC is an ideal business structure that provides flexibility and security. With low costs and minimal compliance requirements, forming a single-member LLC is an easy way to establish your business entity and set yourself up for success.