When it comes to starting a business, entrepreneurs have plenty of decisions to make—from determining the product or service they’re selling to the details of their business structure.
“Business structure” describes the legal organization of a business. In the United States, those types of businesses include nonprofits, corporations, partnerships, sole proprietorships, and limited liability companies, or LLCs.
For many solo small-business owners, the single-member LLC is a popular choice and for good reason. Single-member LLC owners receive many benefits related to income tax, liability, and more.
In this brief guide, we cover everything you need to know about single-member LLCs and whether they might be a good fit for you.
What is a single member LLC?
A single-member LLC is a limited liability company with one owner. LLCs are legal entities that provide owners with personal liability protection—shielding their personal assets, such as a home or car, from legal claims against the business. LLCs can have a single or multiple owners, known as “members.”
In some ways, single-member LLCs are similar to another type of business entity: the sole proprietorship. Like single-member LLCs, sole proprietorships are managed by a single individual. By default, both also are taxed in the same way, though owners of single-member LLCs have more options when it comes to how they pay taxes.
Single-member LLC vs. sole proprietorship: what’s the difference?
Sole proprietorships and single-member LLCs share some commonalities, but there are also some key differences in how they are formed, taxed, and exposed in the case of litigation. Here’s how they compare.
To form a sole proprietorship, a business owner doesn’t need to do anything, especially if they operate the business using their given name. If you plan on offering your freelance project management skills as part of a business that uses your given name, your business is a single proprietorship by default.
If you are a sole proprietor and want to operate under a different business name, such as Perfect Project Management, you’ll likely need to register your trade name—also called a DBA, which stands for “doing business as”—with the appropriate local or state agencies where you operate.
To form a single-member LLC, however, you’ll need to follow the steps required in the state where you operate to formally create the legal entity. Part of the process of forming an LLC is choosing a unique name—one that isn’t registered to another business in your state.
Regardless of whether you’re a sole proprietor or the owner of a single-member LLC, you’ll still want to apply for an employer identification number, or EIN. (Without an EIN, you’d have to share your Social Security number widely—a risk for identity theft.) The US Internal Revenue Service generates EINs, also known as federal tax identification numbers, and uses them to identify business entities.
Business owners are often required to provide EINs for business licensing, permitting, and opening a business bank account. You’ll also use it on tax forms like W9s in lieu of your Social Security number.
For federal income tax purposes, sole proprietors are just individual taxpayers. Their business profit is their personal income, so it’s taxed as such. Sole proprietors must report all of their business profit, minus any qualifying expenses, on their personal tax returns.
Single-member LLCs that do not elect to be taxed as a corporation are considered disregarded entities, which are taxed the same way as sole proprietorships.
Both sole proprietors and single-member LLC owners fill out Form 1040, the document used to file an income tax return, to report profits and losses, and to determine how much they must pay in self-employment taxes, which comprise Social Security and Medicare taxes.
Unlike sole proprietorships, single-member LLCs can elect to be treated as a corporation (usually an S corporation) for tax purposes. There are two primary types of corporations, each with a different tax structure:
- S corporation (single or multi-member LLCs). Members do not pay self-employment tax. Rather, they set a salary that the company pays them, and they pay employment taxes (Social Security and Medicare) on that amount. Any profit on top of their salary is considered business profit, and it’s not subject to employment taxes. It is, however, subject to income tax.
- C corporation (single or multi-member LLCs). The company pays corporate taxes on all profits. Any profit distributions taken by LLC members are also subject to personal income taxes; this is known as double taxation. Members of a C corp don’t have to pay self-employment taxes, but any member that is paid a salary by the LLC will pay payroll taxes on their wages.
So, let’s say Perfect Project Management is a single-member LLC that’s taxed as an S corporation, and owner Pat takes a $75,000 salary and earns an additional $25,000 in profit. Pat pays income tax as well as payroll tax (Social Security and Medicare) on the $75,000 salary, but only pays income tax on the additional $25,000 profit. If it were a single-member LLC without the S corporation status, Pat would pay self-employment taxes on all $100,000.
With the sole proprietor entity type, the law considers the owner and the business to be one in the same. If your business faces a legal claim or lawsuit, both your business assets and your personal property are on the line. Similarly, if you are sued for personal reasons, your business assets could be involved.
As a separate entity, the single-member LLC entity separates—and therefore shields—your personal assets from legal claims related to your business (and vice versa).
How to form a single-member LLC
To form a sole proprietorship, you don’t need to do a thing other than get to work. Forming a single-member LLC requires a few more steps. The process is usually quick, but varies by state and even city; make sure to research the exact requirements in your locale.
- Pick an LLC name. Your name must be unique in your state, so check an online business name database before choosing (try our business name generator). The business name must also end with “LLC,” its entity type.
- Select your registered agent. A registered agent is the person or company that will accept any legal or tax documents for the business. The owner of an LLC can act as the registered agent.
- Do the paperwork. State laws govern single-member LLCs, and any LLC must comply with the rules in the state where it is located. To find out what your state requires, check in with the appropriate state agency—typically the secretary of state—to find out what paperwork is required.
- Create an operating agreement. Some states may require LLCs to include an operating agreement, which details how the business will be managed.
- Get your EIN and business license. A federal requirement of forming an LLC is to get an employer identification number from the IRS. This is like a Social Security number for businesses. You must also register for a business license with your state and/or local government.
- Choose your tax classification. If you don’t file an election to be taxed as a corporation, you’ll be taxed as a sole proprietor by default.
Once you form your single-member LLC, you must ensure that you remain in compliance with your state’s requirements, including paying an annual fee and filing a report, often once a year, to maintain the benefits of protections of the business entity.
The localized research and paperwork involved in forming an LLC may seem daunting, but the liability protection that comes with this business entity may be well worth it.
Compared to a sole proprietorship, creating a single-member LLC does require a few extra steps, but the work to establish a single-member LLC comes with notable benefits—potentially reducing your tax liability and protecting your personal assets from business debts and claims.
Single-member LLC FAQ
What is the difference between a multiple-member LLC and a single-member LLC?
A multiple-member LLC is a limited liability company with two or more owners. This type of LLC is taxed as a partnership, with each owner paying taxes on their share of the profits. A single-member LLC is a limited liability company with only one owner. This type of LLC is taxed as a sole proprietorship, with the owner paying taxes on their entire share of the profits.
Does the IRS recognize a single-member LLC?
Yes, the IRS recognizes single-member LLCs. Single-member LLCs are treated differently than other types of business entities for tax purposes, as they are considered “disregarded entities,” meaning that the business and its owner are treated as one for tax purposes.
Is a single-member LLC the same as a sole proprietor?
Although similar, they are not the same thing. The main difference is that a single-member LLC offers the owner limited liability protection, while a sole proprietorship does not.
Are there any major disadvantages of a single-member LLC?
While they do have many benefits, single-member LLCs also have a few disadvantages that are important to know:
- No personal liability protection. Although LLCs are generally formed to provide personal liability protection for their members, a single-member LLC may not be afforded the same level of protection.
- Self-employment taxes. Unlike corporations, a single-member LLC business structure is not considered a separate entity for tax purposes.
- Limited lifespan. In some states, a single-member LLC may have a limited lifespan, such as expiration after five years, etc.