Limited liability companies are a method of incorporating a business that shields business owners from some taxes. Also called LLCs, these corporations are business structures within the United States that separate the owner's assets from the assets of the business. An LLC is one of the most intuitive ways for a businessperson to protect their personal interests while doing business. The Street contends that LLCs are complicated but possibly the most critical business structure for entrepreneurs to get themselves acquainted with.
The "corporation" part of an LLC can be misleading, however. We all know that corporations are enormous companies run by boards of directors. An LLC can take the same structure, but it doesn't have to. In some legal jurisdictions, you are allowed to form an LLC with just a single person at the head of it. These LLCs are termed single-member LLCs (SMLLCs) because their "board of directors" comprises the sole owner. SMLLCs work as an excellent tradeoff between a sole proprietorship and a corporation.
Exploring The Single Member LLC
An SMLLC, as mentioned before, is just an LLC with a single person at its head. However, unlike a corporation, an SMLLC isn't taxed. The Balance SMB notes that LLCs, in general, don't pay federal income tax since they are seen as non-taxable entities. An owner of an SMLLC needs to file their taxes independently of the corporation. However, the SMLLC offers some unique benefits to its members, including:
- A professional appearance: An SMLLC is far more professional than a sole proprietorship. Partners are more willing to do business with a company they see as "legitimate."
- Privacy: Filing an SMLLC can be done both publicly and privately. A privately filed LLC doesn't have its address and the director's name in the public domain, leading to increased privacy.
- Protections: As mentioned before, LLCs serve as a buffer to protect an owner's assets from litigation. The company's assets are separate from the owner's.
- Tax Savings: In some jurisdictions, SMLLCs are likely to pay fewer taxes at the state level than sole proprietorships.
- Options For Raising Capital: Just because a company is registered as an SMLLC doesn't mean it needs to remain that way. The business may offer additional memberships to others as a means of raising capital.
The Single Member LLC can be highly beneficial for a business owner. Professionals who currently operate as sole proprietors may run afoul of disgruntled clients that could cause loads of legal troubles for them. While settlements may happen that deal with the brunt of these legal issues, the fallout could impact the sole proprietor's assets directly, crippling their business. SMLLC's are a perfect way to protect assets and having the legitimacy of a registered company for just a bit of an extra cost. The savings could be pretty substantial if the business ever runs into legal trouble with a client.
Forming a Single Member LLC
Filing for an SMLLC is similar to incorporating a standard LLC. The procedure to file for an SMLLC is as follows:
- Find a name and conduct a search: You will need a unique name for your LLC within the state. When you come up with one, you'll need to perform a search to ensure someone else isn't using that same business name within the jurisdiction. This search helps to avoid complications later on.
- Prepare the Articles of Organization and LLC Operating Agreement: These documents vary by state and apply to how the business is supposed to be run. Single-member LLCs have a separate operating agreement covering how the company admits new members and the standard operating procedure, including how the business is to be closed.
- Submit the Documents: Once the documents are completed and signed, they can be filed with the state for processing.
- Obtain an Employer Identification Number (EIN): An EIN serves a similar purpose as your Social Security Number when it comes to filing taxes. The IRS usually relies on your SSN or the SMLLC's EIN to calculate taxation. Generally speaking, when you pay taxes, you would use your own TIN/WIN, but not the EIN of the LLC. In 2007, the IRS required LLCs to pay certain excise taxes, for which they required an EIN. Employment tax may fall under this category as well, meaning that owners should have an EIN registered for the business.
Taxation for the Single Member LLC
Above, it was stated that the Single Member LLC is not taxed since the IRS sees it as a disregarded entity. However, this isn't strictly true. If the SMLLC files as an S-Corp or C-Corp, it may be taxed as either one of those corporations. However, it cannot be taxed as a partnership since that would require there to be more than one owner for the company. Single Member LLCs still have to pay a few taxes, including:
- Federal Income Tax
- State Income Tax (if applicable)
- Self-Employment Tax (The owner counts as self-employed)
Is A Single Member LLC Worth It?
In general, a single-member LLC offers options for professionals and business owners alike. An LLC is protected from taxation, and owners only need to pay taxes once on their own earnings. In some states, such as Wisconsin and Florida, businesses don't need to pay any taxes at the state level, allowing individuals to retain more of the business's earnings as income. Clever management of revenue can even help defer the taxes between windows, allowing lower tax rates over a year's earnings.
LLCs have a long history within the US. Many business owners opt for this type of structure because of the protections it offers to their personal assets. You don't even need to reside within a state to have a business registered there in some cases. You can just as easily have a registered agent with a remote registration through a respected third party. These options present possibilities not limited by geographical constraints. If you're a business owner, you should be considering investing in registering as an SMLLC because the benefits far outweigh the downsides.