In the United States, there are a few different types of business formations. The limited liability company (LLC) is a business structure where the owners (called members) are not personally liable for any debts incurred by the company. Additionally, all personal entities are kept separate. LLCs are a hybrid of a corporation as well as a partnership or sole proprietorship.
What is a Single Member LLC?
Single member LLCs (SMLLCs) are the same as any other limited liability company. The only difference between a single member LLC and a standard LLC is the number of members. Under current IRS rules, the single member LLC can elect to be treated as a corporation, but otherwise, it is treated as a sole proprietorship for federal income tax purposes.
The single-member LLC is a solo business entity, and there are many benefits of doing so over a sole-proprietorship.
- The SMLLC is a separate business entity from the owner. It is not attached to the owner for any tax or liability purposes.
- The SMLLC is recognized as a legitimate business. This provides the ability to obtain funding and is seen as more than just a single person operation.
- The SMLLC is formed within a state. Part of this approval process allows you to form anonymously if you choose to.
- There is the potential of tax savings of an SMLLC because you can elect to be taxed either as an individual or a corporation.
How to Form a Single Member LLC
Forming a single member LLC is similar to forming any other LLC. The only difference is that there is only one member, and you may need to mention that in your operating agreement.
Name Your LLC
The name must include the phrase “limited liability company” or one of its abbreviations (LLC or L.L.C.). It cannot contain words such as a bank, agent, or university.
File Articles of Organization
In order to register your Delaware LLC, you will need to file the Articles of Organization. This can be done with the Delaware Corporations Division either online or by mail. These are official documents used to form your business. In these documents, you will provide the name of your LLC, the resident agent, the services you offer, and then pay the filing fee.
Choose a Resident Agent
In Delaware, you will need to have a resident agent in charge of receiving all paperwork for the LLC. In other states, a resident agent is more commonly known as a registered agent. This can either be an entity or person that is responsible for receiving important tax forms, legal documents, a notice of lawsuits, and official government correspondence on behalf of your business. You can either have a member of the LLC or a paid corporation stand in as your resident agent.
Create an Operating Agreement
Although not legally required for an LLC in Delaware, it is a good idea to have one. An operating agreement is a legal document that outlines all of the operating procedures of an LLC. This is important because it lays out how the LLC should operate, reducing the risk of conflict between owners in the future.
How is a Single Member LLC Taxed?
Single-member LLCs are subject to a few different kinds of federal and state taxes. As a business entity, these taxes are paid similarly to how other businesses pay taxes. The only difference is the method of payment.
By additional filing with the IRS, an SMLLC can be taxed as either a C or S-Corporation. This provides different benefits and tax rates as compared to being taxed as a disregarded entity/sole-proprietorship. It is good to note that a single member LLC cannot be taxed as a partnership because it would require more than one member.
What Taxes do Single Member LLCs Have to Pay?
Federal Income Tax
An LLC is not a taxable entity, which means that single-member LLCs are taxed as sole proprietors. This also means that a single-member LLC reports business income taxes on a Schedule C form. The net income from this business will then be combined with any other income on the owner’s income tax return.
Single-member LLC owner is similar to sole proprietors in that they are considered self-employed and are not employees of their business. Because of this, these owners must pay self-employment taxes such as Social Security and Medicare taxes. These will be based on their net income from the business.
State Income Tax
In some states, there is a state income tax, and in Delaware, that state income tax is 4.25%. Despite this, the LLC itself does not pay a state tax, but Delaware does require LLCs to file an annual report with a filing fee of $25.
Employer Identification Numbers
An EIN is your employee identification number. Even if you do not have an employee, you still need an EIN. This is required if you want to open a business bank account.
You can apply for an EIN as an SMLLC by filing Form SS-4, the Application for Employer Identification Number. If your single-member LLC is a disregarded entity, then you will only need to use your personal tax ID when filing the W-9 form as an independent contractor, and you will not need an EIN.
Is Forming an SMLLC Worth it?
Overall forming a single member LLC as compared to a sole proprietorship is completely worth it. Being a single member LLC means you are self-employed, and running a corporation. Whether you need to obtain funding, want to look more legitimate, or simply want to protect your assets, there are a huge amount of benefits involved.