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As a new entrepreneur, you can start and operate a business alone. Some small business owners became sole proprietors first, although this setup poses risks such as personal liability. That’s why it’s always best to form an LLC to reduce the owner’s liability for business obligations.
Now, you may wonder whether an LLC can operate without employees. Read on for the answer (and what to expect if you want to form an employee-free LLC).
Key Takeaways
- You can form an LLC without employees. Starting a single-member LLC gives you this opportunity.
- Single-member LLCs are owned and operated by only one person. They offer benefits such as asset protection, reduced personal liability for business obligations, and pass-through taxation.
- LLCs without employees may face some challenges, including occasional income generation.
- Hiring freelancers, using automation software, and entering strategic business partnerships can help you scale an employee-free LLC.
Forming an LLC Without Employees: Is It Possible?
It’s possible to form an LLC without employees. If you’re a solo entrepreneur and you want to avoid legal disputes, you can form a single-member LLC.
What’s a Single-Member LLC?
A single-member LLC is owned by only one person, allowing you to conduct business without employees. This type of LLC primarily offers asset protection, limited liability protection, and a simple level of operations.
Unlike corporations that hire employees and pay them wages, single-member LLCs let you determine how much you get from the business’s income. Furthermore, you can operate these LLCs according to your needs.
Without employees to hire and manage, a single-member LLC minimizes many of its owner’s administrative responsibilities. You won’t need to process payroll or handle workers’ compensation insurance or employee benefits. However, forming single-member LLCs comes with several advantages and disadvantages.
Bonus Tip
Watch the Ask NCH video below to learn more about forming LLCs without employees.
What to Consider When Starting a Single-Member LLC
Before starting a single-member LLC, take time to consider these factors.
Limited Liability Protection
Single-member LLCs separate owners from business liabilities. Ultimately, this helps protect assets such as real estate, vehicles, and bank accounts.
Still, single-member LLCs could lose its liability protection if their owners:
- Make personal guarantees to creditors or personally pay the company’s debts.
- Take actions that could “pierce the corporate veil.” For instance, courts could hold you liable for a single-member LLC’s obligations if you used the business to mix personal and corporate funds.
Compliance Updates
In Nevada, LLCs can get a charging order filed against them. It’s granted to creditors of an indebted LLC member, allowing these individuals to pursue the latter’s ownership interest.
When a charging order is enforced, the LLC must pay the indebted member’s distributions to their creditor.
Self-Employment Taxes
Single-member LLCs are subject to self-employment taxes. These taxes replace the employer-employee tax split, requiring owners to pay both portions of Social Security and Medicare taxes.
Currently, the self-employment tax rate for single-member LLCs is 15.3% on the first $168,600 of the owner’s combined wages, tips, and net earnings.
Pass-Through Taxation
The Internal Revenue Service (IRS) treats single-member LLCs as “disregarded entities” for income tax purposes. In other words, these businesses are considered part of personal tax returns. But even with this tax classification, a single-member LLC doesn’t pay corporate taxes.
Instead, the company’s income and losses are reported on the owner’s personal tax return. If you own a single-member LLC, you must file Schedule C (IRS Form 1040). Conversely, C corporations are taxed once at the corporate level and again at the shareholder level.
Business Expense Deductions
Single-member LLCs can also deduct business expenses from their taxable income. This can apply to expenses such as home office expenses, equipment purchases, and advertising and marketing costs.
Moreover, single-member LLCs can get the Qualified Business Income (QBI) deduction. They can deduct up to 20% of their qualified business income to reduce their taxable income.
Compliance with Legal Requirements
While you’re not obligated to hire employees as a single-member LLC, you must adhere to state and federal requirements.
Many states require single-member LLCs and other business entities to submit initial and annual lists to their Secretary of State or equivalent offices. Additionally, your LLC must appoint and maintain a registered agent, and it may be asked to pay certain fees annually. All of these steps are key to keeping your business in good standing with its home state.
Managing Business Funds
As we’ve mentioned earlier, commingling personal and business funds can make you liable for a single-member LLC’s legal obligations. This scenario happens when courts decide to pierce the corporate veil.
To keep personal and business finances separate while your single-member LLC operates:
- Open a business bank account after LLC formation. Your chosen bank may require documents such as your Articles of Organization and Employer Identification Number (EIN) for this.
- Get business credit cards. Do take note that banks offer these credit cards with different benefits, so conduct some research first to choose the right ones for your LLC.
The Challenges of Owning an LLC Without Employees
Owning an LLC without employees can create significant challenges as well. They include earning little to no income, potentially making tax planning and cash flow management more complicated.
Also, LLC owners can find it overwhelming to manage their business alone. Possible solutions include working with freelancers and converting the business into another entity to hire employees.
Compliance Updates
Single-member LLCs with no business income are still required to pay taxes. You can learn how to file taxes for these LLCs from our blog.
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How to Scale an LLC Without Employees
If you want to scale an LLC without employees, here are some strategies to use.
Hire Freelancers or Independent Contractors
While you can operate an LLC without employees, you may want to hire freelancers or independent contractors for certain tasks. Both can help you scale your business without running payroll.
You can find freelancers and independent contractors on platforms such as Upwork, Fiverr, LinkedIn, or other job boards.
Use Automation Tools
Cloud-based software solutions perform certain tasks handled by employees, including calculating taxes and implementing digital marketing campaigns. Overall, they can save you time and money. The tools you can use depend on your needs.
Partner with Other Businesses
Strategic business partnerships are another excellent way to scale an LLC without employees. You may enter one with other businesses or independently working professionals in your industry.
Frequently Asked Questions
Can an LLC operate without any employees?
Yes, an LLC can operate without any employees. In this case, a single-member LLC must be formed.
Single-member LLCs are owned by only one person. These types of LLCs offer asset protection, limited liability protection, fewer corporate formalities, and potential tax savings to entrepreneurs who don’t want to hire employees.
Are LLC owners subject to self-employment tax?
Yes, LLC owners are subject to self-employment tax.
A tax rate of 15.3% is imposed on single-member LLCs for the first $168,800 of their owner’s combined wages, tips, and net earnings. It consists of the shares for social security and Medicare.
How do I pay myself from a single-member LLC?
To pay yourself from a single-member LLC, you take “owner’s draws.” Simply put, you get a portion of your company’s income. You can do this by writing a business check to yourself or transferring some business funds to your personal bank account.
Do I need workers’ compensation insurance if I don’t have employees?
Generally, you won’t need workers’ compensation insurance if you don’t have employees. However, it can be essential if you’re at risk for work-related injury or illness. Some personal health insurance plans may offer limited coverage for workplace injury treatment.
Can I hire independent contractors without managing them?
Yes, you can hire independent contractors without managing them. These individuals can work with your LLC on a project-based arrangement. Just make sure to remit all payments to your contractors and issue IRS Form 1099-NEC to them. This form is used to report nonemployee compensation.
What expenses can an employee-free LLC deduct from its taxable income?
The expenses that an employee-free LLC can deduct from its taxable income include:
- Home office expenses
- Equipment purchases
- Marketing and advertising costs
- Travel expenses
Detailed records and receipts will support these deductions during potential audits.
How does a single-member LLC file taxes?
A single-member LLC files taxes by reporting its income and losses on Schedule C (IRS Form 1040).
If the business is required to pay excise taxes, it’ll need to submit several IRS forms. Single-member LLCs must report related activities on Form 637 and excise taxes on Forms 720, 730, 2290, and 11-C.
Do LLCs without employees need an EIN?
Yes, LLCs without employees need an EIN. In fact, LLCs treated as disregarded entities must obtain one for federal income tax purposes.
At most, your LLC would need an EIN to open a business bank account and file business taxes. This tax identification number should also be specified on IRS Form 1099-NEC for nonemployee compensation.
Let NCH Help You Obtain an EIN
Can an LLC get business loans or credit if it doesn’t have employees?
Yes, an LLC can get business loans or credit if it doesn’t have employees.
Lenders consider factors other than the number of employees when evaluating your business loan or credit application. For the most part, they’ll look at your personal business credit score and your business plan.
What should a single-member LLC do if it decides to hire employees?
If a single-member LLC decides to hire employees, it may need to change its business structure. Other important steps for LLCs include getting unemployment and workers’ compensation insurance, as well as updating their operating agreement.
Expert Tips From NCH
- Review your business structure regularly or set measurable goals for yourself. Both will keep you accountable and focused on growing your venture without employees.
- Document your working arrangements with independent contractors. Draft detailed contracts with clear payment terms to avoid potential errors.
- Use cloud-based accounting software to streamline expense tracking, automate tax calculations, and prepare the required documents for tax filings.
- Start building business credit. Effective strategies for this include opening trade lines and paying loans on time.
Launch Your New Business as an LLC Without Employees
LLCs can be formed and run without employees, giving you lots of flexibility and simplicity with asset and liability protection. However, you may face some challenges as your new business grows. Business formation experts, like NCH’s specialists, can discuss the benefits and drawbacks of single-member LLCs with you to help you make the right decision.
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DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.