A single-member limited liability corporation (SMLLC) is one of the most popular types of small business in the United States. This entity has only one registered owner in the state it operates.
This article will discuss how to set up an SMLLC and how it is taxed. It also discusses the benefits for sole-business owners.
How a Single-Member LLC works
“Single-member” refers to the recognition that an LLC only has one owner. The owners of an LLC are called “members”. The single-member LLC is a limited liability entity that has all the benefits of other LLCs.
How to Form a Single-Member LLC
To form an LLC with one member, you will need to file articles or a certificate for the organization in some states. You also have to pay a filing fee. To outline your business operations, you may also want to file an operating agreement. This is similar to a partnership.
An employer ID (EIN) is also required for your new business. This applies even if there are no employees. You may be required to have an EIN in some states before you can file your organization papers. The EIN can be applied online.
Single-member LLCs usually calculate their business income taxes using Schedule C from their tax returns. In this instance, you must use your tax ID (not EIN) when you complete a W-9 form if you are an independent contractor. 1
Single Member LLC vs. Sole Proprietorship
Single-Member LLC
- Limited liability
- Register with the state
- Considered a legitimate business
Sole Proprietorship
- Full liability
- Not registered
- It May not be considered a legitimate business
Advantages of single-member LLCs
Both the LLC with one member and a sole proprietorship can be run as a solo business entity. However, the latter has some advantages.
- The SMLLC can now be considered a separate entity from the owner.
It is not associated with and identifiable with the owner. The liability of the owner is limited to the amount they invested in the business.
- SMLLC is considered a legitimate business. The required “LLC” has been included in the business name.
- SMLLCs are formed in a state. Registration of the business name is required as part of the approval process. A sole proprietor may register a company name with the state. However, it is a separate process.
SMLLCs are more complicated than sole proprietorships. You will need to file an annual report with the secretary of state’s office and pay a fee in addition to the articles.
How is a single-member LLC taxed?
An LLC is not an entity tax for federal income tax purposes. Most single-member LLCs file ScheduleC with their income tax returns. On the owner’s income tax return, Schedule C Net Income (profit/loss) is combined with other sources.
SMLLCs can be confusing because the IRS refers to this type of business as a disregarded enterprise. This means that the IRS disregards the business for tax purposes, and instead collects taxes through Schedule C of the personal income tax filing of the business owner.
Additional Income Tax Options Available for Single-Member LLCs
An LLC with one member can choose to pay income taxes as a corporation or S corp. The LLC must file an election on Form 883 to change its tax status. You must file Form2553 to change your tax status to that of an S corporation. These elections are complicated. Get help from a tax professional.
For single-member LLC owners, self-employment taxes
Like sole proprietors, single-member LLC owners are self-employed. They are not employees of the business. Single-member LLC owners are self-employed and must pay self-employment taxes each year based on the net income they earn from their business.
Frequently Asked Questions (FAQs).
What is the best way to pay yourself when you have a single-member LLC
An LLC owner with one member does not receive a salary, wages, or other benefits from the business. You can withdraw money at any time. Because you are taking money from the business, these payments are known as a “draw”. Remember that you are paid last after all business bills have been paid.
Income tax is not payable on any amount that you take out of the owner’s account each year. Each year, the business pays taxes on its net income (profit), as calculated in Schedule C on your tax return.
You must also pay income tax on your net income. Each year, you will also have to pay self-employment tax for Social Security or Medicare taxes on your business’s net income.
How can you close an LLC with only one member?
Closing a limited-liability company (LLC) is difficult because you have to comply with all federal, state, and local regulations.
You must file specific legal documents to officially dissolve the business. These documents are different for each state. For state income tax or sales tax purposes, you must notify your state’s taxing authorities. To ensure that this is done correctly, consult a tax attorney.
If you have employees, you must notify the IRS about income tax and employment tax. Notify the IRS to cancel your Employer Identification Number.
If you are registering a fictitious business name (“DBA”), you may need to notify the locality.
How can you convert your business structure into a single-member LLC
It depends on the type of business that you have to change to a single-member LLC.
You can register for an LLC if your business is currently a sole proprietorship. You will need to file articles with the state in which you plan to operate your LLC. For the LLC to be registered, you will need a federal tax identification number (EIN), also known as an Employer ID Number (EIN).
The process of changing your company’s structure can be more difficult if you are a corporation or partnership. First, you will need to disband the business and then register the LLC with your state.
To ensure everything goes correctly in both cases, you will need to hire a licensed tax attorney.
