top of page
Search
  • Writer's pictureMysti Williams
    • Apr 6
    • 4 min read

"Demystifying Single Member LLCs: What You Need to Know"

What Is a Single-member LLC?

A single-member LLC (SMLLC), also known as a sole-member LLC, is a limited liability company (LLC) with one owner (member). It protects its owner’s assets from the company’s debts and obligations as a separate entity. A single-member limited liability company benefits from similar LLC tax classifications as a multi-member LLC. According to the Internal Revenue Service (IRS), a single-member limited liability company is classified as a disregarded entity, meaning it doesn’t file a tax return on behalf of the business. The owner’s federal tax return records the business’s profits and losses. The earnings are subject to self-employment taxes using Schedule C in the same manner as a sole proprietorship. Alternatively, a single-member operating agreement can be taxed as a corporation by filing an Entity Classification Election (Form 8832). It’s important to note that states charge an annual fee for limited liability companies through the Secretary of State. For example, any LLC doing business or organized in Florida must pay $138.75 annually.


Single-Member LLC vs. Sole Proprietorship

A sole proprietorship and a single-member LLC are both owned by one person.

However, unlike a limited liability company, a sole proprietorship is not legally separated from its owner. This means the owner is still liable for the business’s debts, losses, and legal obligations.

Single-member LLC

Sole proprietorship

  • Can’t hire employees without an EIN

  • Not a separate entity

  • Needs to use a DBA (Doing Business As) or personal name to create bank accounts

  • Can’t elect corporate tax status

Do Single-Member LLCs Need an Operating Agreement?

Single-member limited liability companies registered in California, New York, Missouri, Maine, and Delaware require an operating agreement.

While not needed for the remaining states, creating an operating agreement when establishing your SMLLC is highly advised.

Should You Create a Single-Member LLC Operating Agreement?

You may not need an agreement if you’re forming a limited liability company. However, it’s highly recommended that you create one for the following reasons:

  • Prove separation: An operating agreement acts as evidence to courts that your limited liability company is a separate entity removed from your assets. This is important if you or your LLC is sued based on your LLC business, and the lawsuit is attempting to reach your assets.

  • Define dissolution/succession: This allows you to outline how assets and liabilities should be distributed if the LLC must dissolve (although liabilities are always paid first) and appoint someone to manage the LLC in the event of your death or incapacitation.

  • Increase credibility: Investors will evaluate your LLC operating agreement before doing business with your company. Banks will often require one to open a bank account.

  • Determine your own rules: Without an operating agreement, your  LLC is subject to the rules governing LLCs in the state where its articles of organization are filed.

Setting Up a Single-Member LLC

Forming a single-member LLC is very similar to starting a multi-member LLC. The steps to creating a single-member operating agreement are as follows:

  1. Name your LLC: You need to follow some basic naming conventions when naming your LLC and ensure that the name is unique. Some states allow you to check online if an LLC name is available.

  2. Choose a registered agent: Appoint a registered agent for your LLC. They are responsible for receiving and filing legal documents. Your registered agent must reside in the same state where your LLC is registered.

  3. File articles of incorporation: To form an LLC, you must file your LLC’s articles of incorporation. You’ll need to pay a filing fee, which varies from state to state, and submit the documents to the Secretary of State’s office.

  4. Draft a single-member LLC operating agreement: Although not required by most states, an LLC operating agreement is essential to LLC formation. It sets out how the limited liability company will operate.

  5. Obtain an Employer Identification Number (EIN): Unlike multi-member LLCs, single-member LLCs technically do not need an EIN. However, an EIN makes it easier to separate personal and business finances, and opening a business bank account for your LLC may be required. You can obtain an EIN online from the IRS.

  6. Apply for business licenses: Depending on the state where your LLC will be formed and the cities where you will conduct business, you may need to apply for a business license before your company can begin operating.

  7. Set up an LLC bank account: Open an LLC account to separate your assets from your business assets.

What to Include in a Single-Member LLC Operating Agreement?

There are several elements that a single-member LLC operating agreement must include:

  • Date and location of incorporation: Include the date the operating agreement is being entered and the state where the LLC was formed.

  • Company details and registered agent: Detail the name, place of business, purpose, and name and address of the registered agent.

  • Management: The name of the owner. Usually, single-member LLCs choose to be managed by the sole member, but not always. A non-member manager can also be appointed.

  • Capital contributions: Outline any capital contributions you make to the business.

  • Payment: How will the LLC compensate you?

  • Dissolution and succession: What will happen to the business if you die or become incapacitated?

  • Governing laws: Include the state in which the LLC was formed.

  • Signatures: As the sole owner, sign the operating agreement.



253 views0 comments
bottom of page