How to Setup a Single-member LLC

Single-member limited liability companies (SMLLCs) are the perfect launchpad for young entrepreneurs who want to kickstart their businesses with minimal complexity and cost.

This type of LLC is easy to form. It involves less paperwork and fewer legal requirements than other entities like corporations. In addition, SMLLCs have lower formation and maintenance costs.

These are only a few of the advantages that single-member LLCs offer. Below, we’ll discuss the other benefits you can enjoy with this entity and outline the step-by-step process of forming an SMLLC.

Read on to discover why many aspiring business owners choose single-member LLCs for their entity.

What is a Single-member Limited Liability Company?

A single-member limited liability company (SMLLC) is a type of LLC with only one owner or LLC member. It’s one of the most common entities in the US and is considered an excellent alternative for sole proprietorships.

These entities offer the same limited liability as a traditional LLC, which means you won’t be held for any debt or liabilities the company incurs.

Advantages & Disadvantages of a Single-member LLC

Aside from simple formation and low costs, there are several other benefits to forming a single-member LLC, such as:

Pass-through Taxation

By default, SMLLCs are considered pass-through entities, meaning everything the company earns and loses is “passed through” to the LLC member. The LLC member must report these earnings on their tax returns using the Schedule C form and pay taxes based on their tax bracket.

This setup allows them to avoid double taxation, which typically happens to corporations.

Flexible Management Structure

SMLLCs can choose to be member-managed or manager-managed, depending on their needs and goals. They don’t have to follow a rigid management structure like corporations do.

A member-managed structure will allow you to retain complete control over the business and its decision-making process. In contrast, a manager-managed structure will allow you to delegate daily responsibilities to one or more managers.

This flexibility empowers you to scale your business structure as it grows. You can start lean with a member-managed structure and later transition to a manager-managed structure once your operation expands.

Limited Liability

The most significant advantage of single-member LLCs is limited liability. Since LLCs are considered legal entities separate from their owners, you will not be held liable for any debts or lawsuits the company incurs.

Creditors cannot go after you or your personal assets to satisfy the company’s debts and other financial obligations.

But like any other entity, SMLLCs also have its disadvantages:

Self-Employment Taxes

Although SMLLCs don’t have to pay taxes, their owners do. SMLLC members are subject to 15.3% self-employment taxes, which includes 12.4% for social security and 2.9% for Medicare.

State-level Restrictions

Most states allow anyone to form SMLLCs, but some jurisdictions have strict restrictions for certain professions. You may not be allowed to form an LLC if you belong to the following fields of work:

• Medicine
• Law
• Accounting
• Architecture
• Engineering

Even those who want to provide financial services, like banks and insurance banks, cannot form LLCs.

Limitations on Raising Capital

Unlike corporations, LLCs are not allowed to issue stock. This could make it challenging for you to attract investors and raise capital.

Piercing the Corporate Veil

Although the asset protections that single-member LLCs offer are strong, they do have their limitations. One such limitation is the risk of ‘piercing the corporate veil.’ This is a legal concept wherein courts can disregard an LLC’s limited liability if its owners are found misusing its structure. This event can happen in several ways, including mixing personal and business finances.

This event can happen in several ways, including mixing personal and business finances.

Despite these drawbacks, many entrepreneurs choose this entity for its simplicity and flexibility.

How to Setup A Single-member LLC

The process for forming an SMLLC varies from one state to another, but they typically include the following steps:

Choose a Name

When choosing a name for your SMLLC, it’s important to pick one that hasn’t been used by any other business in your state. You can use your Secretary of State’s business registry to see if your chosen title is available.

Find a Registered Agent

Most states require all LLCs to have a registered agent, a person, or a company designated to receive legal correspondence on behalf of your business. You can assign an employee to be your LLC’s registered agent if they meet your state’s requirements, or you can hire a third-party service provider.

Complete your Articles of Organization

Once you have a designated registered agent, you can start filling out your articles of organization.

The articles of organization are the primary documents you need to form an LLC. They typically include basic information about your business, such as:

• Business name and address.
• Name and address of the LLC’s registered agent.
• Name and address of the LLC member.
• Form of management structure.

You can file your articles of organization via mail or online. You must also pay a filing fee ranging from as low as $35 to as high as $500 when you file your formation documents. 

Create an Operating Agreement

Although most states don’t require single-member LLCs to submit operating agreements, having one is highly recommended.

An operating agreement is a legally binding document that defines how your company will function and details its decision-making processes.

Do single-member limited liability companies need an operating agreement? Yes. Most It’s a common belief that single-member LLCs don’t necessarily need an operating agreement. However, these documents help reinforce the idea that the LLC is separate from its owner.

They may also be necessary for opening business bank accounts or obtaining loans. Potential lenders and investors will check how your business is structured and managed before they approve your loan.

Don’t be Afraid to Go Solo

Launching a business on your own may seem scary initially, but entities like single-member LLCs are here to empower you.

SMLLCs offer a blend of simplicity, cost-effectiveness, and flexibility that perfectly suits the needs of many young entrepreneurs, providing a sense of reassurance and ease. They provide several benefits, like limited liability and pass-through taxation, giving you a head start in the race to success.

Don’t let your fears stop you from becoming a solo entrepreneur. Instead, let them motivate and inspire you to launch your single-member LLC today with NCH’s assistance.

At NCH, we aim to help our clients establish their businesses with confidence and ease. Our expert team of business specialists is here to provide comprehensive support throughout the entire process, from formation to compliance. We will ensure that your SMLLC has the foundation to succeed and thrive.

Take the first steps to forming an LLC today. Visit our website here or call us at 1-800-508-1729 to schedule a consultation with one of our business formation specialists. 

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.