When you start a new business, there is usually a lingering fear in your mind about what would happen if your business goes into debt. Will you be personally liable? Will you end up losing all your savings?
While this is a possibility in certain cases, you can protect yourself by choosing to be a Limited Liability Corporation. As the name suggests, the liability of the owners or members is limited in an LLC. And the best part? Even a single-owner business can become an LLC.
What is a single-member LLC? How do you form one? What about the taxes? You can find answers to all these questions and more below.
A single-member LLC or an SMLLC is an LLC that has only one member, and that is you. Unlike an LLC with multiple members, only one person has voting rights and makes all the important decisions.
As with any other LLC, the member's personal assets are protected if the business goes into debt. An SMLLC is a way to put a veil between your personal and business assets.
This veil is only valid as long you do not mix your personal assets with your business assets. If you use your business account for personal expenses, you void the protection offered by an SMLLC.
Even if you start as an SMLLC and your business grows in the future, and you feel the need to include more members, you can do so with great ease. You will then become like any other multiple-member LLC. The personal assets of all the members will be protected in case the business runs into debt.
An SMLLC also gives you the freedom to choose how you file taxes. You can either choose to be taxed as a sole proprietorship or pay single-member LLC taxes.
Now that you have a clear picture of a single-member LLC, it is time to decide if it is the right structure for your business. To do so, it is pertinent that you understand the advantages and disadvantages of becoming an LLC.
Here are the pros of becoming an SMLLC.
- Protect Personal Assets: This is the foremost reason to consider becoming an SMLLC. It protects all your personal assets and ensures that you are not personally liable for the losses incurred by your business. Running a business is a complex process, and many external factors impact its success. Protecting your personal assets will offer you some peace of mind.
- Legitimacy: An SMLLC is a legitimate business entity. Once you register as an SMLLC, you can add 'LLC' to your business' name. What's in a name, you ask? It gives suppliers and buyers confidence and adds a level of trust with your customers, even if you're starting afresh.
- Grow With Ease: Many entrepreneurs may feel that a sole proprietorship is enough when starting a business. However, as your business grows, you will have to adopt a formal business structure, and an LLC is an excellent one to choose. By choosing to register yourself as an SMLLC, you make this process simpler and reduce a lot of headaches in the future.
- State Approval: You get the state's approval when you register as an SMLLC. You will have to register the business for taxes, payroll, and licenses. It is good to do these anyway to create a structure for your business and streamline various business processes.
- Protect Business Name: When you register to become an SMLLC, the name of your business is registered as yours with the state, meaning that no other business can take that name.
- Choose Single-Member LLC Taxes: You have various options to pay single-member LLC taxes, such as sole proprietorship, C Corp, or S Corp.
Here are the cons of becoming an SMLLC.
- Maintaining the Corporate Veil: You have to be meticulous about not mixing your personal and business assets. If you pierce the veil and use your business account to pay for personal expenses or vice versa, you become personally liable.
- Paperwork: Filing to become an LLC involves a significant amount of paperwork. You need to file the Article of Organisation and annual report with the state. All of these can be confusing and time-consuming.
Forming an SMLLC might involve more paperwork than that of a sole proprietorship. Here are is how you go about forming a single-member LLC.
- Find the website of the Secretary of State for your state and register your business' name on it. You will have to create an account to log in and declare your business entity as an SMLLC.
- You have to now complete Articles of Incorporation and an operating agreement. This should also be done on the same website where you registered the business.
- The next step is to register for an EIN or an Employer Identification Number. It is good to get the EIN even if you do not have any other employees as it is needed when you file single-member LLC taxes and open a business account.
- You now need to declare a registered agent. The registered agent will receive all correspondence related to single-member taxes. While some states allow you to be the registered agent, some others do not permit this. Check your state guidelines before making a choice. The registered agent should also have a listed address and should be available to receive communication at the address at all times.
- You now need to open a business account for your LLC.
- You also need to obtain all the relevant licenses to run your business according to state laws.
You have now successfully formed an SMLLC. All you need to do now is to ensure that you stick to the regulations and submit your annual reports on time. It is also a good idea to have an electronic copy of all the documents.
By default, the IRS treats an SMLLC as a disregarded entity. This means that you are treated as a sole proprietorship for tax purposes, and you will have to report all your business income under Section C of your personal tax returns.
However, you can choose to file your single-member LLC taxes as an S Corp or a C Corp. As a C Corp, all your business' income will be taxed at a corporate rate. Additionally, you will have to pay taxes on any dividends you get from the SMLLC. This leads to double taxation and is best avoided for an SMLLC.
An S Corp is a pass-through entity for single-member LLC taxes. You will pay taxes at a personal rate on the income you receive from the business.
Since you need to maintain the corporate veil between your personal finances and those of your business, you need to write yourself a check when you are paying yourself and record the amount as the owner's draw.
Can a single-member LLC have employees? Yes, it can. Single-member LLCs can hire employees just as any other business entity. However, you will need to withhold payroll taxes and forward them to the IRS. You also need to abide by the state and federal laws for hiring employees.
Single-member LLCs are an excellent choice when you need to bring a formal structure to your business and legitimize it. It increases the trust in your business and also limits your liability. While it does involve more paperwork, it might be worth the effort, especially if you continue to expand your business.
As a SMLLC, you will need to maintain proper records of transactions. Fincent can help you in this aspect. Our dedicated and professional bookkeeping team was created by creative business owners for creative business owners and let you get back to doing what you love -- building your business.