Exploring the Basics: What is a Single Member LLC?

For someone who wishes to run their own business, continuing as a sole proprietorship may seem simpler than becoming an SMLLC. We understand that sole proprietorship is the most basic of the existing business structures, requiring no formal and complex actions. Still, various advantages to being set up as an SMLLC make the transition worth it. 

Even though the two business structures seem similar on the surface level, there are key differences in how they are set up, taxed, and protected in case of a lawsuit. 

• Formation:  An SMLLC needs to create an Operating Agreement and typically file Articles of Organization with the state as part of the formation procedure. Some states require publishing formalities like getting company licenses and similar processes. On the other hand, you can form a sole proprietorship immediately when an individual begins doing business without official registration formalities. Yet, depending on the location and type of the firm, the owner might still be required to acquire the necessary licenses or licenses.

While sole proprietorships are simpler to form and relatively smooth and simple to run, they don’t offer as much protection and security as an LLC. In comparison, SMLLCs are considered a lot more professional than sole proprietorships. 

SMLLCs are an attractive option for starting a business because they’re easy to form. The only thing to note is that all the rules and regulations vary from state to state. You can look for your particular state’s needs and requirements and general information on SMLLC formation by IRS here.  

You should still register for an Employment Identification Number, or EIN, whether you’re a sole proprietor or the boss of a one-member LLC. Without an EIN, you would have to provide your Social Security number to many people, increasing your risk of identity theft. Federal tax identification numbers, often known as EINs, are created by the IRS and are used to identify corporate companies.

For business licensing, permitting, and creating a business bank account, all business owners need to apply for an EIN. In addition, you’ll substitute it for your Social Security number on tax documents like W9s.

• Taxation: Both SMLLCs and sole proprietorships are similar in terms of taxation. They are both pass-through entities, which means the business is not liable to pay income taxes. They both fill out Form 1040, the document to report profits and losses, file income tax returns, and calculate the self-employment taxes they must pay, including Social Security and Medicare taxes.

Although, an LLC can elect to function as an S- corporation or a C- corporation for taxation purposes. These are both two types of corporations with distinct tax structures. 

• Liability: The benefit of a single-member LLC over a sole proprietorship is that the owner’s liability may be limited to the amount of their investment in the business. In contrast, sole proprietor exposes their assets to danger each time they do business.

Confused? As a sole proprietor, you could lose your business assets and private property if your business faces any legal challenges or a lawsuit. If someone sues you personally, they can also claim your business assets. The law recognizes the owner and the business as separate entities, which is why this can occur. Whatever happens to one side of the business affects the other. 

As an SMLLC, your assets remain protected against any legal claims related to your business and vice versa.