The Single-Member Limited Liability Company (SMLLC)
With the upward trend in entrepreneurship over the past few years, business startups are blooming all over the nation. Perhaps you have started a business of your own, whether it be your full-time job or a side gig, or you’re considering doing so. Entrepreneurs often get excited about converting their ideas and concepts into a business; however, the legal aspects of doing so can be daunting.
If you decide to go solo in starting your own business, the next question is what type of legal entity you will be. Many consider the single-member limited liability company (SMLLC), which is similar to operating as a sole proprietor, but offers a layer of liability protection. However, there are a few precautions you should be aware of with this type of entity.
What should you know before you start a single-member LLC?
Setting up a single-member LLC is minimally a matter of filing the appropriate documents with the Secretary of State and paying a small fee.
Although a single-member LLC comprises of one person, I still highly recommend the LLC have an operating agreement. The agreement is made between the single member and the LLC. It covers the member’s rights, duties, and obligations to the LLC, and also helps with liability protection as it separates the LLC from the member personally.
The single member should also open a bank account specifically for the LLC. Doing so separates his or her personal assets from the LLC’s, further protecting the business’s limited liability status. The bank may require a copy of the operating agreement when opening a bank account or making a loan to the LLC.
2. Liability Protection
A single-member LLC will protect the member’s personal assets from debts and liabilities associated with business conducted on behalf of the LLC. However, in order to uphold this limited liability, it must be clear the LLC is a separate entity from the member. In order to prove so, it is essential the member keep the company’s money and property separate from his or her personal assets, to use “LLC” at the end of the business name, and to maintain detailed business records. If it cannot be proven that the LLC is really a separate entity, the Court may pierce the business’s limited liability veil and hold the member personally liable.
According to the IRS, if a single member LLC does not elect to be treated as a corporation, the LLC is a “disregarded entity.” The company’s profits or losses are taxed through the single member’s personal federal tax return on Schedule C. The single-member LLC is taxed as a sole proprietor; however, the sole proprietor is not a disregarded entity because the business is not separate from the owner.
If the single-member LLC elects to be treated as a corporation, it will be taxed as such. You should consult with your accountant to determine whether it is more advantageous to be taxed as an LLC or corporation.
This post is only intended to be informative and is not a substitute for comprehensive legal advice. If you have further questions regarding the single-member limited liability company or further inquiry about starting a business, please contact my office at (319) 229-7060 or email me at firstname.lastname@example.org to schedule a consultation.