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Single Member LLC

Corporate Compliance by Local Corporate Guides®

Single member LLCs are one of the most common business entities in the United States. Considering a single member LLC? Single member LLCs share some similarities with multi member LLCs and sole proprietorships, but there are some significant differences as well. Learn everything you need to know about single member LLCs in our guide below.

Understanding Single Member LLCs

1

What is a Single Member LLC?

A single member LLC is a limited liability company with only one owner. Generally, single member LLCs are not much different from LLCs with multiple members. However, single member LLCs are taxed differently by default and may have fewer liability protections.

2

Single Member LLC vs Multi Member LLC

Below are the major similarities and differences between forming an LLC with one member and forming an LLC with multiple members.

SIMILARITIES

Both single and multi member LLCs:

  • Form by filing Articles of Organization with the state.
  • File any required state compliance reports, such as annual reports.
  • Have limited liability.
  • Need a registered agent.
  • Can choose to be managed by members (owners) or managers.
  • Can file IRS paperwork to be taxed as an S-corp or C-corp.

With default taxation, both single and multi member LLCs:

  • Are pass-through entities. (This means the business itself doesn’t pay income tax. Instead, income “passes through” the business and is reported on members’ personal returns.)
  • Pay self-employment taxes on all income.

DIFFERENCES

So how are single member and multi member LLCs different? The biggest differences between these types of LLCs are liability protections and tax filings.

Liability protections

Both single and multi member LLCs have limited liability. However, multi member LLCs tend to have better liability protections for the following reasons:

  • Separate finances: A single member LLC is made up of just one person—so the distinction between the business and owner can easily become blurred. This is particularly true if the LLC isn’t careful about separating business and personal finances. In a courtroom, if lawyers successfully argue that the LLC and owner are really the same entity, the LLC can lose its separate liability protection.
  • Creditor awards: Many states offer stronger protections from creditors for multi member LLCs. For example, if a member has personal financial trouble, their LLC interest could be awarded to a creditor. Typically, creditors are only entitled to distributions, not controlling power in the business. However, this protection doesn’t usually extend to single member LLCs—meaning single members are at greater risk of losing control of their LLCs if they suffer personal financial trouble. One of the reasons Wyoming LLCs are so popular is due to the state’s strong single member LLC protections.

LLC tax filings

By default, single member LLCs are taxed as disregarded entities. Multi member LLCs are taxed as partnerships. This means their federal tax filings are a little different.

  • Single member LLCs: The member attaches a Schedule C to Form 1040 to report profits and losses.
  • Multi member LLCs: The LLC files Form 1065, attaching a Schedule K-1 for each member. The LLC also gives a copy of Schedule K-1 to each member. Members use the information from Schedule K-1 to complete Schedule E, which they attach to their personal tax returns to report profits and losses.

Otherwise, LLC taxes are pretty similar. Both single and multi member LLCs have pass-through taxation and pay self-employment taxes on all income (assuming they keep their default tax status). Both kinds of LLCs can also change how they are taxed by filing for S or C-corp election.

3

Single Member LLC vs Sole Proprietorship

Both single member LLCs and sole proprietorships are businesses that, by definition, have a single owner.

Sole proprietorships share other similarities with single member LLCs as well. For instance, sole proprietorships pay self-employment taxes on all income. They report income to the IRS by filing Schedule C, just like a single member LLC with default taxation.

However, there are many more differences than similarities. In the chart below are the major differences between single member LLCs and sole proprietorships.

Single Member LLC

Sole Proprietorship

Formation

Articles of Organization filed with the state

No formal paperwork to form

Reporting requirements

Must file any state compliance reports (such as annual reports) and pay state fees

No state reporting requirements

Liability

The owner and the LLC are legally separate entities with separate liabilities. For instance, business debts and assets belong to the business, not the owner.

The owner and the business are not legally separate; they share all liabilities.

Owner title

An owner is called a member.

An owner is called a sole proprietor.

Ownership

Can be an individual or an entity, like a corporation or another LLC.

Must be an individual.

Management

The member can choose to make all business decisions or hire a manager to make all decisions (the member would retain the power to remove the manager).

The sole proprietor makes all business decisions.

Tax options

Automatically taxed as a disregarded entity. Can elect to be taxed as an S-corp or C-corp.

Taxed as a sole proprietorship. Cannot change tax designation.

Overall, sole proprietorships are easy to form and maintain, but they lack the tax options and liability protections of an LLC. Many businesses begin as sole proprietorships and later become single member LLCs.

Considering switching to a sole proprietorship? Check out our article on why you should turn your sole proprietorship into an LLC.

4

Single Member LLC Operating Agreement

An LLC operating agreement sets the internal rules for your company, including information on management, membership, contributions, profits and losses, and other powers and procedures. But if you’re the only person in your company, do you really need an operating agreement?

Many single member LLCs operate just fine without an operating agreement. You don’t have to worry about management disputes or splitting profits, so it may not be necessary to put procedures in writing. That’s not to say that single member LLC operating agreements are useless—there are a handful of reasons why you might want a written agreement.

  • Opening a business bank account: Requirements vary state to state and bank to bank, but you may be asked to show your operating agreement when you go to open a bank account for your LLC. Opening a business bank account is absolutely essential. To maintain your limited liability protections, you MUST keep your business and personal finances separate.
  • Documenting key information: Your operating agreement is a good place to list any important information that doesn’t appear in your Articles of Organization, such as your initial capital contributions.
  • Restricting transfers and dissolution: Single member LLC operating agreements often include language limiting the powers that are transferred along with membership interest. The idea is that if a creditor is awarded your membership interest, they will only receive distributions instead of the power to manage or dissolve the LLC. Note, however, that the LLC statutes of your state will ultimately determine whether these limitations carry any weight.
  • Learning about business ownership: For a new business owner, taking the time to read and complete an operating agreement can be a useful learning experience. Understanding the language of operating agreements—“indemnification,” “nominee,” “continuance of company,” etc.—will help you understand your LLC better.

At Northwest Registered Agent, we offer a single member LLC operating agreement template you can use for free.

5

Single Member LLC FAQ

Does a single member LLC need an EIN?

Single member LLCs don’t always need an EIN. You’re required to get an EIN if you are taxed as a corporation, have employees, or file certain excise taxes. You may need an EIN for state tax obligations or opening a bank account as well, so it’s often best just to get one when you form your business.

Can a single member LLC have employees?

Yes, single member LLCs can have employees. Like any other business, you’ll need to get an EIN, set up payroll and withholding, and abide by federal and state employment laws.

How do you fill out a single member LLC W9?

Many single member LLCs work as independent contractors and receive W9s from their clients. A W9 is a request for your tax ID number. The W9 form is pretty straightforward except for Part I—which tax ID number to list. If your LLC has an EIN, you would think you would list your LLC’s EIN, right? Nope.

The tax ID number you give is for the OWNER of the LLC. If the single member LLC is owned by an individual, enter that person’s social security number. If the single member LLC is owned by an entity (like another LLC or a corporation), put that entity’s EIN. DON’T list your single member LLC’s EIN.

How do you pay yourself in a single member LLC?

You aren’t considered an employee of the LLC, so you don’t have a salary. Instead, you put money into the LLC and take it out as needed. Taking out money is known as an “owner’s draw.” You can just transfer the money from the LLC’s account into your own or write a check.

How can I dissolve a single member LLC?

Single member LLCs are formed and dissolved at the state level. To dissolve your LLC, you’ll need to file Articles of Dissolution with the state agency that oversees business in your state. If your LLC isn’t properly dissolved, the business may continue to accrue state fees and taxes. Check out our dissolution guide to learn how to dissolve your LLC in each state.

Corporate Compliance
by Local Corporate Guides®