When it comes to forming a business, one of the first decisions that entrepreneurs have to make involves the structure of the company. For companies with only one owner, the possible considerations are a sole proprietorship, corporation, or a single member limited liability company (LLC).
Understanding A Single Member LLC
As the name implies, this business entity structure is a type of LLC. It is suitable for sole company owners, who are called members.
Generally, LLCs are disregarded entities when it comes to taxation. The Internal Revenue Services (IRS) treats single member LLCs like sole proprietorships. The member will report profits and losses in their personal income tax return. The company will also not be taxed at a corporate level.
However, unlike a sole proprietorship, these companies are separate entities. The member will not be personally liable for the actions and debts of the company.
Aside from asset protection and pass-through taxation, LLCs also offer other advantages. Here are some of them:
- Choosing to form an LLC gives entrepreneurs access to various opportunities for raising capital. For instance, the company can add members to get more investments.
- It is easy to transfer LLC ownership. The member can sell the LLC without interrupting the business operations. That is less complicated than meeting the requirements in selling a sole proprietorship, which includes the selling of parts like assets, licenses, and permits separately.
- Being registered as an LLC gives the company a more professional appearance.
- The legal requirements for running an LLC are less compared to that of a corporation.
Where Single Member LLCs Work Best
The benefits of forming a single member LLC make it an appealing option for many startups. However, entrepreneurs should make sure that the structure suits their needs and circumstances. Here are some things companies have to consider before proceeding with the registration process:
- Does the company’s business activities create personal risks? There are risky business activities that can affect owners. So if limited liability protection is necessary, then the company should consider registering as an LLC with the state. For example, forming single member LLCs may be a smart move for entrepreneurs working in construction or pet care.
- Is it possible to keep the company and personal finances separate? The limited liability protection that an LLC offers is only effective if the company maintains the separation of personal and business interests. So it is best to consider this first before registering for an LLC.
- Does the company have multiple ventures? Some entrepreneurs—such as those who run a movie studio, real estate developers and investors, and owners of restaurant groups—have multiple ventures. They may need to register a parent or holding LLC that will serve as the owner of several single-member LLCs. Registering branches as single-member LLCs will protect them against any issues that may arise with the others. At the same time, it retains the asset protection for each branch and the flexible taxation feature of the structure.
- Do you have rental properties? Forming a single member LLC may be ideal for entrepreneurs who have bought their first rental property or own a few rentals. The structure will protect those assets against the liabilities of the business.
Creating Single Member LLCs
Generally, the process of forming this type of business entity will vary depending on the laws of the state where the company decides to register its operations. Here is a simple step-by-step guide on how to form single member LLCs:
Step 1: Choose an appropriate name. The company name has to comply with the naming regulations of the state where it is being organized. It has to be distinguishable, which means the LLC can no longer use a name that another entity in the state has already taken.
States also require the inclusion of a proper designator. It can either be the phrase “Limited Liability Company” or any of its abbreviations like “LLC” or “L.L.C.” Business entities are not allowed to include any term that could mistake the company for a government agency.
Step 2: Nominate a registered agent in the state. All states require the appointment of a registered agent for service of process of the company. They will receive all legal correspondence and government mail on behalf of the LLC. Each state has a set of qualifications that LLCs have to check before choosing a registered agent. Check out our state-specific articles and the Five Traits Of A Good LLC Registered Agent For Your Business.
Step 3: Choose the management structure of the LLC. Single member LLCs have the option of whether they will be member-managed or manager-managed. If the company chooses to be member-managed, then the owner will be in charge of all the activities and daily operations of the company. On the other hand, manager-managed single member LLCs are those that opt to hire a manager to take care of business operations. Some states have a default management structure, which is usually member-managed.
Step 4: File Articles of Organization. In some states, this formal paperwork may also be known as a Certificate of Formation. Whatever it is called, this document will formalize the registration of the company and legalize its operations in the state. It comes with a filing fee. The cost of filing and the requirements will vary depending on the state. In most cases, state agencies offer readily available forms.
Step 5: Create an operating agreement. This document is internal, so it is not necessary to prepare one. However, having it will help set the procedures for running the LLC. It can also determine the process of accepting new members, selling the LLC, or closing the business.
Step 6: Obtain an Employer Identification Number (EIN) from the IRS. Even single member LLCs may need to get an EIN. This is especially true if the company plans on hiring employees or opening a business bank account. The application for an EIN is free of charge and can be done online.
To know more about the process of forming LLCs, it is best to consult with experts. Our team at DoMyLLC can not only help with the business formation process but also ensure compliance with state obligations.
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