Forming a Single-Member LLC: Guide and FAQs

Forming a Single-Member LLC: Guide and FAQs

Are you confused about whether to form a single-member LLC (or SMLLC)? It is a popular option for a single-member LLC. If you are forming a business entity in which you are the sole member, an SMLLC may be right for you.

An SMLLC has many tax advantages and operational flexibility that other business structures do not provide. This guide will help you decide if an SMLLC is the best business entity for you.

What is a Single Member Company (SMLLC)?

A single-member LLC has one owner or member. This means that one individual has full responsibility for the company, including responsibility for paying taxes. Many freelancers choose to set up an SMLLC because this gives them the freedom to add additional employees in the future.


Why form a single member company?

Besides being a limited liability entity, an SMLLC has many advantages, including:

  • Flexible taxes. An SMLLC can be taxed as a sole proprietorship or a corporation, depending on the merits of either. Consult your tax advisor to determine which tax method may be best for you.
  • Flexible administrative framework. Many small businesses prefer an SMLLC structure over a corporation because of the lower reporting and recordkeeping requirements.
  • Public record. Your SMLCC will be on public record by name. As such, competitors will be prevented from repeating your name.
  • Name credibility. Compared to a sole proprietorship, an SMLLC gives more weight and legitimacy to your specific name.

How do I create a single-member LLC?

1. Choose the name of your Limited Liability Company (LLC).

Determine the desired name for your SMLLC and search your state registry to make sure it is still available. Most states enable you to reserve a name before creating your SMLLC if you are not yet ready to form your own SMLLC.

2. Appointment of a registered agent

Most states require that a person or entity registered with an SMLLC be over 18 years of age, physically present in the state and available during standard business hours during the week to receive legal documents on behalf of your SMLLC.

3. Obtaining appropriate licenses and permits

Many states require that you obtain a general business license and may require your business within a particular industry to secure more appropriate licenses to do business in the state. Make sure you have the proper licenses and permits from the appropriate local or state government agency.

4. Register your SMLLC

Once you have completed these initial steps, you are ready to register your SMLLC with the state authority. To do this, you must file your articles of incorporation (called the “articles of incorporation” in some states) and, in some states, your operating agreement.

  • Prepare your articles of incorporation. The information you need to specify in your articles of incorporation includes the name and address of your company, the name and address of your registered agent and the reasons for incorporating your company. Your SMLLC Articles of Incorporation can be filed either in person, by mail, or online and requires a certain fee. Filing this online is usually the quickest route, often taking 24 to 48 hours.
  • Create your own operating agreement. An operating agreement defines how your company will operate and details the ownership structure for its members. Often times, in most states, your operating agreement does not need to be filed with the state. Despite your status as the sole member of the company, this is still an important document to protect your company from lawsuits.

SMLLC vs. Sole Proprietorship: What’s the Difference?

Small and medium-sized businesses are similar to a sole proprietorship because one person runs the business entity. But there are differences that affect how each is formed, taxed, and exposed to liability in their respective business structures.

formation

A sole proprietorship is created without having to file any government paperwork to that effect, usually in the name of the sole proprietor. To form an SMLLC, you must submit official documents to the state to be recognized as such.

Tax collection

For federal tax purposes, sole proprietors need to report their income and losses as part of their personal income tax. With an SMLLC, you must decide if you want to be taxed as a corporation (usually as an S corporation) or if you prefer to be taxed as a “disregarded entity LLC” so that you are taxed as a sole proprietor. For tax purposes, a disregarded entity is one that allows a company’s profits and losses to pass through to an individual’s personal income.

Legal liability

A sole proprietor’s personal assets are vulnerable to business lawsuits, while an SMLLC member’s personal assets are protected from lawsuits. The opposite is also true: If a sole proprietor is sued personally, his or her business assets become vulnerable to the lawsuit; If an SMLLC member is sued personally, his or her business assets are not subject to any judgment.

In short, a sole proprietorship is a simpler form of business, but it carries liability risks that small and medium-sized businesses do not. Depending on the nature of your business needs and services, an SMLLC – with a few additional registration steps – may be the best fit for your business venture.


Pros and cons of SMLLC

If you are still deciding whether an SMLLC is right for your business, consider the following pros and cons of creating an SMLLC for your business:

It is worth noting that you can hire a business formation service to handle all the paperwork and compliance to ensure that you are in good standing with the government.


Are you still deciding if a single-member LLC is right for you?

Review all your business entity options and select the right one for your company from the comfort of your home. Get help from experts today!

Legal Disclaimer: This article contains general legal information but does not constitute professional legal advice for your particular situation and should not be construed as creating an attorney-client relationship. If you have legal questions, you should seek the advice of an attorney licensed in your jurisdiction.

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