So, you’ve taken the plunge and started your own business. If it’s been successful, you may have heard about the benefits of forming a single member LLC. Whether you’re exploring this entity to look more official, need it to comply with local legislation, or have discovered the liability perks, there are some things you should know before you set it up. (Starting with, is it even right for you?)
Get the facts about this simple legal construct that’s becoming more popular among freelancers. It might be your ticket to better things.
What does LLC mean?
Before we get into the details of a single member LLC, you may be wondering, “what does LLC stand for?” LLC means “limited liability company,” and it’s been around awhile. All types of businesses might want to use this legal structure, from one-person magician shows to small family orange farms to agencies that hire freelance UX writers. An LLC is a state-based entity, so the process for forming and holding one varies by state.
The owners of an LLC are called “members.” So, if you have just one owner, you could decide to form a single member LLC. You would get all the perks of an LLC with more than one member, as well as any disadvantages.
Benefits of an LLC
Why would anyone want to go through the process and expense of forming an LLC? How is it better than just remaining a sole proprietor? There are a few notable reasons worth considering. LLC advantages including, but not limited to:
- A single member LLC is a legitimate and formal business entity. You’ll even include “LLC” as part of your business name. Many LLC names look like this: Your Cool Business Name LLC. For some industries, this designation may be preferable. And some entrepreneurs feel it sounds more polished.
- A single member LLC is legally a separate entity from the member (or owner). You are not your LLC, and it is not you. This means that you, the owner, receive limited liability from your business as long as you play by some basic rules of the road.
- A single member LLC comes with state approval. As part of this process, you may be able to register for payroll, taxes, and/or licensing. Forming an LLC doesn’t automatically cause these other things to happen, but it can usually be rolled into the process. Some states will require one or more of these tasks as part of the LLC application, so if you have a large business “to-do” list, forming the LLC can get you part way there.
- Forming a single member LLC gives you legal standing for the name of your business in your state. No two companies in a state can have the same legal name.
There are other perks, including some tax considerations (more on that later). For most business owners, forming a single member LLC is part of making a business legit in the eyes of the government, a bank or a regulating agency. It may not be necessary but can help ease other requirements.
LLC liability protection
Sole proprietors are considered the same entities as their business for liability purposes. If your business is sued, it would be the same as you getting personally sued. You may have to dig into your personal assets and savings to make restitution for any fines or fees.
A single member LLC, on the other hand, limits the liability of the owners. The company takes the hit for any damages. Though you may have to sell off assets, file bankruptcy, or dig into company coffers, there’s less chance someone could come after you personally.
But keep in mind, forming a single member LLC doesn’t 100% guarantee you aren’t liable for wrongdoings. In business talk there’s a term called “piercing the veil.” In a lawsuit, the court could find that you don’t truly separate business from personal matters, making it hard to show where you end and the business begins.
In this case of a “pierced veil,” you could have a hard time proving you aren’t personally at fault and liable for a business wrongdoing. This is one example of when your personal assets could be at risk.
Tips for setting up an LLC
Unlike running a sole proprietorship, which just requires you to start your business and start making money, LLCs take more work (and more money). Here’s a quick summary of what you can expect:
- Locate your state office and see which forms you need to file.
- Fill out and submit your LLC articles of organization, including your company’s new (and formal) name.
- Pay a filing fee.
- Wait!
You’ll also need to choose a registered agent. This is someone who agrees to accept letters, contracts, and other legal correspondence on behalf of your company. Their address should be listed as well, and usually it can’t be a P.O. box.
Can you be your own registered agent? It depends. Some states allow this, and it’s obviously the easier way to go. Just know that if you choose to act as your own agent, you must be available to receive communications during business hours at the address you listed.
Once your LLC articles of organization have been issued, you’ll have to keep some of your filing data on hand, to be used for filing each year’s annual report. This is usually a simple form you can fill out online at your state’s website (Florida’s annual report, for example, requires confirmation of address, agent name, and business number).
This is not a profit or loss statement and not the same type of annual report you might hand out to investors or stakeholders for your business. If you handle your own company finances, this won’t be anything too complicated, but it’s important to get it done and filed on time. If you fail to do so, the state could put your business out of business. (Plus, some states will leverage hefty fines!)
Check your state’s renewal filing requirements, too. Some states will ask for a confirmation of your intent to keep doing business as an LLC every few years or so, in a separate action from providing your annual report. This may be part of renewing your business license. Expect to pay for this renewal as well.
How much does an LLC cost?
There’s no cost to start an LLC on a federal level. Instead, what an LLC costs to set up (and maintain) varies by state. Here’s a table that breaks down LLC cost by state:
| State | LLC Fee | Due |
|---|---|---|
| Alabama | $100 minimum | Annual |
| Alaska | $100 | Biennial |
| Arizona | $0 | Annual report due |
| Arkansas | $150 | Annual |
| California | $800 (Franchise Tax); $20 (Statement of Information) | Annual; Statement of Information biennial |
| Colorado | $10 | Annual |
| Connecticut | $80 | Annual |
| Delaware | $300 | Annual |
| Florida | $138.75 | Annual |
| Georgia | $50 | Annual (online) |
| Hawaii | $15 | Annual |
| Idaho | $0 | Annual report due |
| Illinois | $75 | Annual |
| Indiana | $32 | Biennial (online) |
| Iowa | $30 | Biennial (online) |
| Kansas | $50 | Annual (online) |
| Kentucky | $15 | Annual |
| Louisiana | $30 | Annual |
| Maine | $85 | Annual |
| Maryland | $300 | Annual |
| Massachusetts | $500 | Annual |
| Michigan | $25 | Annual |
| Minnesota | $0 | Annual report due |
| Mississippi | $0 | Annual report due |
| Missouri | $0 | |
| Montana | $20 | Annual |
| Nebraska | $25 | Biennial (online) |
| Nevada | $150 for Annual report; $200 for business license registration | Annual |
| New Hampshire | $100 | Annual |
| New Jersey | $75 | Annual |
| New Mexico | $0 | |
| New York | $9 | Biennial |
| North Carolina | $200 | Annual |
| North Dakota | $50 | Annual |
| Ohio | $0 | |
| Oklahoma | $25 | Annual |
| Oregon | $100 | Annual |
| Pennsylvania | $7 | Annual |
| Rhode Island | $50 | Annual |
| South Carolina | $0 | |
| South Dakota | $50 | Annual (online) |
| Tennessee | $300 | Annual |
| Texas | $0 | Annual report due |
| Utah | $18 | Annual |
| Vermont | $35 | Annual |
| Virginia | $50 | Annual |
| Washington | $60 | Annual |
| Washington DC | $300 | Biennial |
| West Virginia | $25 | Annual |
| Wisconsin | $25 | Annual |
| Wyoming | $60 minimum | Annual |
How LLCs are taxed
According to the IRS, single member LLCs are considered “disregarded entities.” They are, for all purposes, ignored by the IRS for the purposes of paying income taxes. This simply means that you’ll file and pay taxes just as you would as a sole proprietor. This is important to note because if you go from being a sole proprietor to a single member LLC, your federal tax treatment won’t change.
You’ll use your 1099-MISC forms, total up your earnings, subtract expenses and other deductions, and then put your totals on a Schedule C to figure out how much you’ll owe (or how big of a refund you’ll get).
A multiple-member LLC or another type of corporate structure doesn’t have this simplicity. They will need to file additional tax forms, and—in some states—even pay a separate or additional corporate tax. Corporate taxes can be complicated or even expensive to prepare. Consider the simplicity of a disregarded entity to be another tally in the “perks” column!
But what if you don’t want to be taxed as a sole proprietor? Well, as a single-member LLC you can choose your tax treatment. You can elect to be taxed as a C Corp or an S Corp by filing a tax election form with the IRS.
If you elect for C Corp taxation then every year you’ll fill out a corporate tax return and your LLC will pay taxes on its profits at the corporate rate. If you elect for S Corp tax treatment, then you’ll complete an informational return for your business at tax time, but your business won’t pay corporate taxes. (This is for federal taxes, the state you operate in may have a corporate tax of some kind). Instead, you (the owner) will pay taxes on your LLC’s profits.
Depending on your state and business situation, this may or may not be a good deal for you.
When a single member LLC might be wrong for you
While we can’t give advice on what type of business structure is the best for you, we can help you understand when a single member LLC isn’t ideal:
- You don’t have the money to pay for the ongoing maintenance fees.
- You’re getting by just fine as a sole proprietor and don’t want the hassle of additional paperwork.
- You have more than one owner and require a multiple-member LLC or other corporate structure.
One of the disadvantages of a single member LLC is that it usually requires renewing periodically. Depending on your state, you would pay that fee every few years. If you don’t see the legal or financial benefit of your new LLC, it can be hard to justify this expense. California, for example, charges a flat minimum annual tax on corporations, regardless of size or structure, in the amount of $800.
On the other hand, incorporation may be required to participate in some activities within your state. If the choice is between paying to incorporate or not doing business, that’s an easy choice to make.
Forming your single member LLC
So, you’ve decided a single member LLC is for you! What happens next? Check out your state’s department of revenue, franchise tax board, or another applicable website to see what you need to do first. The process of registering your LLC varies from state to state.
Do a simple web search to see what site is best suited for your needs. Begin now, but know that you’ll likely end up dealing with the secretary of state’s office. Some states take weeks or even months to get the paperwork through; the sooner you start, the sooner you can call yourself an LLC!
Linsey Knerl is a Midwest-based author, public speaker, and member of the ASJA. She has a passion for helping small business owners do more with their resources via the latest tech and finance solutions.