Single-member LLC: What it is and how to set one up

You’re looking to start a business, or you may already be a solopreneur or self-employed. Either way, you’re ready to take the next steps and turn your freelancing or side hustle into an official business.

But you may be wondering how to add credibility and structure to a single-person business or whether you need to form a legal entity. That’s why it’s worth knowing the possible business structures you can use, such as limited liability companies (LLCs). Let’s dig into exactly what structure solopreneurs can use to officially set up their business, including why they use single-member LLCs.

How Single-member LLCs work

Single-member LLCs (SMLLCs) are LLCs with a single owner (hence the name), making them popular choices for solopreneurs and single-person businesses. A single-member LLC is a legal entity you register with your state, giving you limited liability for business debts and obligations.

The legal and liability protection an LLC offers is known as the corporate veil—an invisible curtain that protects your personal assets from the debts and obligations of your business. If you mix your personal and business assets, creditors can force you to use personal assets to pay business debts or settle lawsuits.

Pros and cons of single-member LLCs

Liability protection is just one of the benefits of forming an SMLLC. For example, you also have added credibility and tax advantages. 

Other benefits of single-member LLCs include:

• Personal liability protection: One of the main reasons entrepreneurs choose to form an LLC is to protect their personal assets. In the event of legal actions or business debts, the LLC structure shields your personal assets.
• Credibility and professionalism: A single-member LLC offers credibility as a recognized business entity within the state it operates. It assures potential clients that they are dealing with a legitimate business.
• Flexible tax options: LLC taxes have flexibility, where you can choose your tax classification, allowing the owner to opt for pass-through taxation or be taxed as a corporation. This flexibility can be advantageous when considering personal income tax returns.

If you do decide to create a legal entity like a single-member LLC, you’ll also need to consider:

• Paperwork: Unlike a sole proprietorship, a single-member LLC requires various paperwork, such as articles of organization and annual reports. The additional paperwork and ongoing tasks can be time-consuming.
• Fees and ongoing costs: Forming and maintaining a single-member LLC comes with associated fees. This usually includes a filing fee to register the LLC and annual fees.
• Compliance: Failure to meet the state's requirements and maintain compliance can result in penalties, like fines, loss of limited liability protection, or even dissolution of the LLC.

While a single-member LLC offers liability protection and other benefits, it’s essential to weigh the administrative burden—especially when you compare it to the simplicity of a sole proprietorship.

Single-member LLC vs. sole proprietorship

A sole proprietorship is another popular option for single-person businesses, as it’s the simplest in terms of formation. It’s not a legal entity, meaning you don’t have to register it with the state or other agencies. Note that you might need to register your self-employed business for certain licenses, depending on your industry. 

The biggest difference between sole proprietorships and SMLLCs is liability protection. A sole proprietorship does not provide any separation between the business owner and their personal assets. In the event of business debts or legal issues, the business owner's personal assets could be at risk.

You don’t have to file anything with your state to have a sole proprietorship, especially if you’re just using your name. For example, if you plan on freelancing or consulting as an individual, you can use your name without registering anything. However, even if you decide you need a professional name, you can set up a DBA.

Single-member LLC vs. multimember LLC 

The biggest difference between single- and multimember LLCs, as the names imply, is the number of members. If there are two or more owners of an LLC, it’ll be a multimember LLC. 

Both offer the same liability protection, but there are four key differences you’ll want to take note of:

• Ownership: SMLLCs have only one owner, which can be an individual or another legal entity. On the other hand, a multimember LLC has multiple owners, who can be individuals, other businesses, or a combination of both.
• Management: In a single-member LLC, the owner has full control over the decision-making process and the day-to-day operations. In contrast, a multimember LLC often has a more complex management structure, with owners needing to define their roles and responsibilities and potentially appoint managers.
• Taxes: From a tax perspective, a single-member LLC is typically treated as a disregarded entity, and the owner reports the business income and expenses on their personal tax return. In contrast, a multimember LLC is treated as a partnership for federal tax purposes and must file a separate tax return. The individual owners then report their share of the LLC's profits and losses on their personal tax returns.
• Compliance: In terms of legal requirements, single-member LLCs and multimember LLCs are generally subject to similar filings, such as articles of organization and annual reports. However, multimember LLCs may need to take additional steps, such as drafting an operating agreement outlining ownership percentages, profit distribution, and decision-making processes.

Once you know the type of LLC you need, it’s time to form your business. 

How to form a single-member LLC

Unlike a sole proprietorship, to start a single-member LLC you’ll need to follow a few steps to register your business before you become operational:

1. File your articles of organization: This document officially establishes the LLC and provides basic information about the company, such as its name, address, and the name of the owner. Along with the articles of organization, you’ll pay a filing fee. Note that your name must not be in use by another LLC in your state.
2. Pick a registered agent: This is an individual or company designated to receive legal documents and official correspondence on behalf of the LLC.
3. Create an operating agreement: While not always required by law, preparing an operating agreement is highly recommended for single-member LLCs. This legal document can help protect the owner's personal assets and clearly define the business's operations.
4. Get an EIN: Obtaining an Employer ID Number (EIN) from the Internal Revenue Service (IRS) is another important step for a single-member LLC. This unique nine-digit number is used for tax purposes and allows the owner to separate their personal and business finances. With it, you can open a business bank account.
5. Remain compliant: You’ll want to ensure you file any required forms, such as your annual report.

Once your LLC is in place, you can consider the tax status and plans for how your business will be taxed.

Tax considerations for single-member LLCs

One big reason many solopreneurs pick SMLLCs is the tax flexibility. Taxation of single-member LLCs default to being a pass-through entity (aka a disregarded entity), but you can also elect to be taxed as an S-corp or C-corp.

• Sole proprietorships: Single-member LLCs have the same tax status as sole proprietors by default. In this case, you file your personal and business taxes on a single return. In particular, you’ll fill out Form Schedule C with your business income as part of your personal tax return. The LLC itself does not pay taxes.
• S-corp: This is still a pass-through entity for tax purposes; however, you’ll still need to file a yearly tax return to the IRS for the business. The LLC does not pay taxes as the income or loss passes through to your personal tax return.
• C-corp: Electing C-corp taxation means the LLC itself will file a yearly tax return and pay taxes at the corporate tax rate.

You’ll want to consult with an accountant or tax professional to determine the most advantageous tax classification for your businesses circumstances.

Start your business with confidence

Starting a business can be an exciting but daunting endeavor. It includes figuring out your ideal business structure, with each having advantages and disadvantages in areas such as liability protection, taxation, and operational flexibility. Choosing the right structure for your business is crucial for long-term success.

Setting up your business tools early, such as having a startup-friendly accounting software like QuickBooks, is a great way to stay on top of cash flow management from day one.