If you’re the sole owner of a business, you may have considered forming a single-member LLC. A single-member Limited Liability Corporation (SMLLC) is a business classification that can help protect you from potential liability and help you maximize your tax benefits.
Forming a single-member LLC can be advantageous for your business. And unlike forming a corporation, forming a single-member LLC is a fairly simple process. Below, our experts at Tax Defense Partners talk more about why you may want to form a single-member LLC and how you can do so.
What is a Single-Member LLC and Why Form One?
If you’re the sole owner of business, your default business classification in the eyes of the IRS is a sole proprietor. If you are a sole proprietor, you and your business are the same legal entity. So should your business get sued for any reason (such as for debts), you could be held legally responsible for any business liabilities. This means that if your business owes debts, someone could legally pursue your personal assets (such as your home or personal bank account) to settle these debts.
However, a Limited Liability Corporation (LLC) can help protect you from being legally liable for your business’s legal issues. Forming an LLC separates a business from its owners in the eyes of the law. So if an LLC has debts or legal obligations, it’s the LLC that is legally liable, not the owner or owners of the LLC.
A standard LLC can have multiple members (owners). But a single-member LLC has only one member. So if you are the sole owner of your business, an SMLLC would be appropriate for you.
In addition to offering protection for legal liability, an SMLLC offers you flexibility with how you pay your taxes. By default, SMLLCs are taxed with pass-through treatment, which means they pay taxes like a sole proprietor would. But an LLC can also opt to be taxed as a corporation. So if it would be more advantageous for your business to be considered a corporation for tax purposes, you can choose to be taxed as one.
How to Form a Single-Member LLC
Forming a single-member LLC is fairly simple. But to form an SMLLC, you do need to follow a number of different steps, which we’ll outline below.
Step 1: Choose a Business Name
Your LLC must have an official name that isn’t not already taken by another LLC in your state. When you’re deciding on your LLC’s name, you can search online to see whether or not a name you like is already taken.
Step 2: Choose a Registered Agent
An LLC must have a registered agent, which is a person or business that would accept legal documents or lawsuits on behalf of the LLC. An owner of the LLC is often the registered agent for the LLC but you can also choose an outside party to be your registered agent.
Step 3: Create and File Articles of Organization
An Articles of Organization (which can sometimes have a different name, depending on your state), is a basic document that establishes your LLC. This document requires some simple information, such as your LLC’s name, address, and owners. Most states have a simple standard form that you can fill out to create your Articles of Organization.
Step 4 (Optional): Create a Single-Member LLC Operating Agreement
This step is optional but highly recommended. An SMLLC Operating Agreement is a document that states how your LLC will be run, sets out responsibilities for members, and details business procedures. Creating an SMLLC Operating Agreement is recommended because a well-thought-out Operating Agreement can help show separation between the LLC and its owner, which helps protect your limited liability. This document is not something you need to share with your state (it is kept at your place of business) but it is advantageous to have one should your LLC have legal issues in the future.
Step 5: Submit Your Articles of Organization and Filing Fee
Next, submit your Articles of Organization to your state, along with your filing fee. Filing fees vary by state, ranging from around $100 to several hundred dollars. In most states, your LLC will be formed the moment you complete this step. After your LLC is formed, your state will mail you a certificate of formation.
Step 6 (Optional): Get a Federal Tax ID Number
If you have a SMLCC, you do not need to get a federal tax ID number for you business, but you may want to. You can choose to use either your Social Security number or a federal tax ID number when filing your taxes, when opening a bank account, or when seeking a loan. Consider whether or not you would be comfortable using your Social Security Number for business matters and decide whether or not you want to get a federal tax ID number accordingly.
Step 7: Open a Bank Account For Your LLC
Open a bank account which you will use solely for your business. This will make record keeping easier and it is also essential for protecting your limited liability status.
Final Thoughts on How to Form a Single-Member LLC
Forming a single-member LLC is something that can be incredibly advantageous for you as a business owner, as well as for your business. If you’re considering forming an SMLLC, we hope this guide has been helpful as you go through the formation process.