How to Start a Single-Member LLC
A single-member limited liability company (often shortened as SMLLC) is a form of a business structure that has a single owner (hence the name).
Single-Member LLC - Choose Your State
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Steps to Forming a Single-Member LLC
- Give Your SMLLC a Name
- Find a Registered Agent
- File the Articles of Organization for Your SMLCC
- Draft an SMLLC Operating Agreement
- Acquire an EIN for your SMLLC
Alternatively, you can entrust the process of SMLLC formation to a trusted professional service:
- Northwest: $39 + state filing fee
- Tailor Brands: $49 + state filing fee
Generally speaking, the process of forming a single-member LLC comes down to filing your Articles of Organization with the Secretary of State, after which you become an official owner of the business. However, this is not a one-step process.
Further down, we will walk you through the important steps on how to set up a single-member LLC from start to finish, as well as explain how this business entity differs from others, who can benefit from its formation, and how a single-member LLC is taxed.
What Is a Single-Member LLC?
As opposed to a traditional LLC that may have one or more business owners, a single-member LLC is a legal entity created by a single member. Regardless, it has all the same advantages as other LLCs, including pass-through taxation and the liability protection of personal assets.
Advantages of Setting up a Single-Member LLC
To elaborate on the advantages of a single-member LLC, here are the most common of them:
- Liability protection. An SMLLC ensures the protection of its members’ personal assets from liabilities in case of business debt, bankruptcy, etc.;
- Credibility. You get a chance to add “LLC” to your company name, thus, setting it aside from the crowd and making it seem more legitimate in the eyes of your customers;
- Easy to grow. Owners of SMLLCs have the flexibility to add new members and sell part of their business by amending their docs, which makes it easier for them to grow;
- Flexible tax filing. Finally, you can choose whether to file taxes as an S corporation or as a sole proprietor.
SMLLCs Disadvantages
However, there are also a few disadvantages that you should be aware of when deciding on the right business entity for you. Here they are:
- SMLLCs have quite a lot of paperwork to do;
- It’s necessary to maintain a compliance calendar by regularly filing reports on the current status of your business;
- It’s also important to maintain the corporate veil, i.e. keep personal assets separate from business gains to ensure personal asset liability.
Understanding the Difference Between a Sole Proprietorship and an SMLLC
Despite the fact that you’re going to be automatically treated as a sole proprietor upon your SMLLC formation, an SMLLC and a sole proprietorship aren’t the same things. What sets SMLLCs aside is that they enjoy more benefits, including:
- The option to choose how to file income tax returns;
- The right to add new members to the business;
- Personal liability protection for all members.
A sole proprietorship, on the other hand, is not a legal entity. It’s an unincorporated business created and run by one individual (a sole trader). In fact, no government participation is required to create one - once you start working, your sole proprietorship begins.
Understanding the Difference Between an SMLLC and an S-Corporation
Some SMLLC owners choose to be taxed as an S-corporation. This can be beneficial if you have multiple stakeholders and would rather reduce your self-employment taxes by entitling all stakeholders to report on their income from the business.
However, this structure is more strict in terms of formation requirements and is better suited for those who plan to grow fast and attract new stakeholders to the business.
How to Form a Single-Member LLC: Step by Step
Forming a single-member LLC isn’t a complicated process. However, the steps and requirements may slightly vary by state, therefore, making preliminary research on the requirements of your locale won’t go amiss.
Below, we’ll go through the essential steps of creating a single-member LLC with no link to any particular state, so you can get a general idea of what needs to be done to get your business off the ground.
1. Give Your SMLLC a Name
First things first, you need to give your company a name. The company name is very important, as it not only creates the first impression on your customers but is also something that people will associate your service or product with.
With this in mind, it’s important to select a name that clearly conveys the essence of your business, is easy to remember, and appeals to you. Other naming rules might slightly vary depending on the state, but, more often than not, they come down to the following:
- Name legalities. A business name of a newly-formed SMLLC must indicate what type of business entity it belongs to by including the appropriate words, such as LLC or L.L.C.;
- Name restrictions. Any confusing words, such as “federal”, “law”, “state”, etc. that may mislead people into thinking that you’re delivering government services are banned;
- Explanatory words. If possible, it’s a good idea to use words that define your business goals, except for profession-specific words that imply creating a PLLC;
- Name availability. Before getting attached to any name, make sure to make a quick search to see if it’s available - this option is provided by most states in the US;
- Name reservation. If you’ve chosen a name but are not ready to form an SMLLC just yet, most states allow you to reserve it for a certain period of time;
- Get a domain name. Even though you might not need a website just yet, most SMLLCs will benefit from having one, so it’s best to get the perfect name before it’s gone.
2. Find a Registered Agent
Next, you need to find a registered agent (RA) who will be responsible for receiving and processing your SMLLC paperwork. This is a requirement of the law that is valid throughout the country, meaning any business, regardless of its business structure and locale, must have one.
Essentially, a registered agent (also known as a statutory agent or a resident agent, often shortened to RA) is a point of contact between your company and the government. In other words, it’s a business official, designated to process documents on your behalf.
When it comes to the requirements for a registered agent, they are pretty much the same across all states of the US. A registered agent can be any individual over 18 or a company that has a physical street address within the state of an SMLLC’s formation.
In fact, you can also be your own RA. However, note that a registered agent, no matter who you choose, must be readily available during business hours, which are from 8 a.m. to 5 p.m. If you work after these hours, it’ll be best to delegate this work to a third party.
Other reasons to consider hiring a professional company rather than doing the work yourself include:
- Privacy. By providing RA details, you can keep your personal information, such as first name, last name, and home address, from public records;
- National coverage. Since most RAs operate in all US states, they make it easier for companies to expand their business without the need to travel;
- Compliance. Registered agents ensure that the correspondence is handled in due time and the company’s kept in good standing;
- Assistance. Most RAs will also provide help with preparing and filing reports, which will save you a lot of headaches;
- Online storage. Depending on your needs, RAs can also offer secure online storage of your documents;
- Improved brand image. Lastly, with an RA, you’ll save yourself the embarrassment of having to deal with sensitive information in front of your clients.
3. File the Articles of Organization for Your SMLCC
Once you’ve chosen a registered agent, it’s time to prepare and file your Articles of Organization (known as a Certificate of Formation in some states). This is a legal document that establishes the fact of a company’s creation at the state level.
Regardless of which state you form your SMLLC, the information to put in the articles of organization will be the same, including details, such as:
- Your business name;
- Registered street address;
- Information about your statutory agent;
- Business management structure;
- An organizer’s signature.
This document is then submitted to the Secretary of State for a filing fee, which varies by state. Most states allow you to submit the Articles of Organization online, by mail, or in person.
On average, the review process takes around 5-7 days. However, if you want to expedite things, you can pay an additional fee.
Once your Articles of Organization have been reviewed, you’ll receive the document signed in the mail.
4. Draft an SMLLC Operating Agreement
An operating agreement isn’t a required document (except for California, New York, and Missouri), but one that’s recommended to have. It’s created by companies to outline the internal rules and obligations of each member.
As a result, if you have any disputes in the course of running your business, an operating agreement will help settle them.
Aside from that, a good-written operating agreement makes it easier for companies to grow. You can describe at the outset how investors will be treated, which may encourage them to supply investments in your SMLLC.
Besides, an operating agreement is a legally-binding document, meaning it can be used in banks and other institutions as proof of your business entity’s proper functioning.
5. Acquire an EIN for your SMLLC
An Employment Identification Number (EIN) is a nine-digit number assigned to business entities for tax purposes. It is needed by most companies, including SMLLCs, that plan to hire employees, use separate bank accounts, and pay certain other taxes.
In all other cases, you can use your Social Security number instead.
That said, having the EIN can be beneficial even for SMLLCs without employees. If you need to apply for a loan or carry out any other bank transaction, for example, you’d be asked to bring with you a tax ID, and using your Social Security number may not be the best idea in that case.
So, it’s best for all LLCs, regardless of their business structure, to get one, especially since it can be obtained for free by simply filing with the IRS online.
First Tasks After Creating an SMLLC
Once your Articles of Organization have been reviewed and approved, you will receive a confirmation letter, proving the legal status of your company. However, it’s early to relax. There are a few more things to take care of before diving into work.
Open a Business Bank Account
If you want to avail yourself of the advantages of liability protection, it’s vital to maintain the “corporate veil”. Metaphorically speaking, it’s a curtain that separates your personal assets from business assets. And the only way to do so is to use a business bank account.
By opening a business bank account, you will have the following benefits:
- Shield your personal savings;
- Be able to prove that you and your company are separate financial entities should you ever receive a claim against your SMLLC or if someone files a lawsuit.
To open a bank account, you’ll need to bring with you your Articles of Organization and the EIN number (so if you’ve decided not to obtain it, you may want to think again).
Find an Accountant
Perhaps, the hardest part of running a business is having to keep track of finances, which can get even more overwhelming if you have multiple members on board. However, you don’t have to do all of this yourself.
In most cases, you’d be much better off if you hire a professional accountant. An accountant will not only help manage the finances of your business but also help with financial analysis so you can invest in the service/product that brings the most profits.
In addition, an accountant can offer assistance with the preparation and filing of tax reports, making it less stressful for you to maintain your company’s good records.
Insure Your Business
Another step to take after filing your SMLLC is to look into the insurance needed to run your business.
If you’re going to hire employees, you’ll be required to obtain worker's compensation insurance, designed to provide wage replacements in case of bodily injuries, diseases, or job-related accidents.
Once your SMLLC is officially recognized, ensuring operational efficiency and financial prudence becomes paramount. Engaging a professional accountant can alleviate the complexities of financial management, fostering more strategic investment and resource allocation.
This step is vital in delineating personal and business finances, crucial for upholding the integrity of your corporate veil.
In addition, adequate business insurance, such as employee compensation, should be in place, not only complies with legal requirements but also safeguards your enterprise against unforeseen liabilities, thereby stabilizing your business foundation.
These proactive measures are essential for nurturing a resilient and legally compliant business environment.
Depending on the nature of your business, you may also get general liability insurance, which will give you peace of mind that your company’s not going to be affected in the event of a claim made against it by a third party.
Keep Your SMLLC Compliant
As an owner of a single-member LLC, you don’t need to file annual reports, which makes your paperwork less of a hassle. However, you will still need to report on your personal income tax returns by filing Schedule C of Form 1040.
Furthermore, you will need to maintain all licenses and permits required for your business. If you don’t know if you need one, make sure to consult a local lawyer.
How Is a Single-Member LLC Taxed
Finally, let’s dive into the tax system so you can understand which method of payment suits your business best.
Each newly-formed SMLLC is seen as a sole proprietor and is treated as such by default, which means, unless you choose to be taxed differently, you’ll be taxed as an individual taxpayer. In this case, any profit you make will be treated as the business profit and will be subject to taxes.
The self-employment taxes are submitted by filling out Form 1040 and comprise Social Security and Medicare taxes.
That said, you can also choose to be taxed as a corporation. Single-member LLCs can choose between two options:
- S corporation. Members pay taxes only on the amount of income that the company establishes as wages. Everything earned on top is not subject to taxes;
- C corporation. Except for the self-employment taxes, members that are paid a salary pay taxes on all profits, including those distributed between LLC members.
If you need help understanding which option is right for you, make sure to discuss it with your accountant.