The first thing an entrepreneur needs to do is to choose a structure for his business. If you need the liability protection of an LLC, but also the simple tax reporting of a sole trader, a single-member LLC may be the right structure for you.
Today, a limited liability entity refers to one of the most widespread structures. Thousands of people choose it for their enterprises, having appreciated its numerous advantages.
Based on the number of the owners, LLCs are usually divided into a single-member and a multi-member venture. An SMLLC means a company with only one owner, who has independently established its budget. The status of such companies is usually similar to that of any other LLC.
For federal tax goals, businesses formed by a married couple might be considered SMLLCs. However, take into account that these companies are considered MMLLCs at the state level.
Not all states recognize an SMLLC as a separate legal model. In most of them, the owners of SMLLCs can face a lack of limited liability protection. However, when you establish a venture in Nevada, Delaware, or Wyoming, there is no need to worry about the safety of your private assets: cars, houses, savings, and the like. These states give an SMLLC the same status as an MMLLC.
The issue of maintaining the integrity of the “corporate veil” for single-member LLCs is especially vital. To mitigate risks, the owner should take care of separating their personal and corporate funds by opening a commercial bank account. It will not only ensure that you are acting as an LLC instead of a sole proprietor but will also simplify the bookkeeping process.
The SMLLC owner can earn income when the company’s revenue is apportioned. In that event, an LLC acts as a “pass-through” tax unit, transferring the tax liability to the owner, who indicates the earnings in a personal tax return. Another available option is to switch to corporate taxation. Here, you can make an extra “reasonable” wage based on the industry’s average salary.
Strengths and Weaknesses of a Single-Member Company
The popularity of an LLC can be explained by the following features:
- Credibility: Unlike a sole proprietor, a single-member LLC stands for a formal organization, which has been registered with the state. It can enhance your reputation among potential customers and partners;
- Tax flexibility: As an LLC owner, you are allowed to select one of the available tax regime options. The IRS can treat a firm as a disregarded entity or as a corporation. It provides you with the ability to select the ideal fit for each company;
- Protection of the owners’ private funds: Since an LLC runs a business on its own behalf, its debts and liabilities cannot be handed over to another party. It means that the creditors’ claims will be confined to the company’s funds in the event of a suit;
- Ease of maintenance: While there are numerous formalities involved in operating a corporation, LLCs require little time and money. Naturally, you will still need to handle some paperwork, but it is significantly less.
Speaking about the cons of this model, we should mention the following:
- Cost: In contrast to a sole proprietor or partnership, launching an LLC requires official incorporation and some associated expenses. Besides, don’t forget about the ongoing requirements, like an annual report;
- Taxes: The LLC owner is in charge of paying the self-employment tax, the rate of which is 15,3% as of this writing.
Single-Member vs Multi-Member Entity
The first and most apparent distinction between a single-member and a multi-member venture is, of course, the number of owners. An SMLLC is founded by a single member, who is usually liable for the organization’s capital building itself. An MMLLC, on the other hand, brings together two or more participants. In general, they invest in the venture jointly. The ownership shares of each of the owners are determined in proportion to the amount of the contribution made.
Another significant disparity between an SMLLC and an MMLLC lies in taxation. By default, the IRS treats a single-member company as a sole proprietor. This means that all firm’s income and expenses are reported on the owner’s personal return, while the entity is tax-exempt. A multi-member LLC, in turn, is taxed the same as a partnership. That is to say, corporate proceeds and losses are reflected on the owners’ tax returns, while the organization files the Schedule-K-1 form. However, MMLLCs and SMLLCs can switch to corporate tax status by filing an appropriate application with the IRS.
Finally, these two structures are managed differently. It is expected that the owner of an SMLLC personally defines the goals of its development, makes important managerial decisions, and maintains the daily running of the venture. Although they may hire a bookkeeper or manager, the management of the organization is actually handled by a single person.
The management functions of an MMLLC can be distributed among all or only a few participants according to their skills. Moreover, if the owners do not want to be personally involved in the day-to-day operation of a firm, it is possible to delegate this routine to managers. As in the case of active participants, the rights and duties of professional managers are usually listed in the Operating Agreement. At the same time, all fateful decisions concerning key aspects of an LLC are still made only by the owners of an enterprise.
Basic Steps to Launch an SMLLC
If you have decided to bring your business idea to life by opening an LLC, you need to follow the statutory procedure. The start-up process may vary from state to state, but it generally includes the following key phases:
- Deciding on a name: The coveted name should reflect the nature of your organization and, at the same time, comply with legal requirements. Make sure that the chosen LLC name includes an “indicator” to the type of business and does not contain prohibited words such as “federal,” “bank,” “insurance,” etc. Above all, the name has to be unique. To ensure that there are no other entities with the same or deceptively identical name in the state, perform a name search on the Secretary of State’s website;
- Appointing a registered agent: Every LLC needs a representative to receive official correspondence. This person acts as an intermediary between the structure and the state, guaranteeing a stable interaction between them. As long as the standards are met, the duties of a registered agent can be performed by such individuals as:
- Professional service, etc.
- Drafting and sending the Articles of Organization: Once you verify that the name complies with the legal criteria, and you assign an agent, you can file the formation paperwork. It is the most crucial step because if they are approved, the company will be formally founded;
- Getting an Operating Agreement: Although in most states it is up to the owner whether to prepare this paper, an Operating Agreement is a good way to protect your company. By providing a management structure and basic operating procedures, you will make the entity more stable and prevent potential managerial conflicts;
- Securing an EIN: Most LLCs need an Employer Identification Number, which the IRS issues free of charge. It is used to open a bank account, pay taxes, hire employees, and a few other things;
- Opening a business checking account: To retain limited liability, the owner of a single-member LLC needs to separate their personal funds from the assets of the firm;
- Securing permits and licenses: A company often needs one or more licenses to start operating. Their type and cost depend on the field to which your company belongs, as well as on its location