When starting a new project, it is essential to choose the right business structure. Single-member LLCs are a very popular option among entrepreneurs without partners because of their many advantages.
In this guide, we'll cover everything you need to know so you can decide whether a single-member LLC is the best option for you. We'll look at what it is, its pros and cons, how it works and how it compares with other business structures you could also use.
What is a Single-Member LLC?
A single-member LLC is a limited liability company with a single voting member. That member is the owner of the LLC.
By contrast, multi-member LLCs have several partners who hold ownership percentages in the business and vote to make important decisions.
Regardless of the number of owners, all LLCs offer:
- Liability protection: the company's owners are protected from personal liability for the company's debts or liabilities. Instead, liability falls on the LLC, which means the company is treated as its own legal entity.
- "Pass-Through Taxation": The LLC doesn't pay taxes as a company; instead, the tax liability passes through to its members' personal tax returns. If you are not a U.S. resident, your LLC will not pay taxes in the USA.
Pros and Cons of a Single-Member LLC
Opening a single-member LLC will bring several advantages and disadvantages to your business.
| Pros | Cons | ||
|---|---|---|---|
| Liability protection: an LLC is a separate legal entity. | Costs: an initial filing fee, and there may be annual fees and reports to file with associated costs. | ||
| Ability to add new partners | Paperwork: You may have to file annual compliance forms to show that you are in compliance | ||
| Tax flexibility: on the federal tax return, it can file as a sole proprietorship or as a corporation | Separation of personal and business assets: Failing to separate personal and business assets puts your corporate veil, and therefore your personal wealth, at risk | ||
| Transfer of ownership: You can transfer ownership to other people | |||
| Pass-Through Taxation: Taxes are paid not as a company, but as an individual |
How to open a single-member LLC
A single-member LLC is registered following the same steps to open an LLC:
- Choose the state where you want to register your Single-Member LLC: There are 50 states where you can register an LLC, and each has its pros and cons.
- Select a name for your Single-Member LLC: Your company name must be distinguishable within the state and include the words "Limited Liability Corporation" (LLC). The state prohibits the use of several terms.
- Get a registered agent: A person who is at least 18 years old and resides in the state where you form your LLC will act as the registered agent. He or she will be responsible for delivering official documents to the members. Numerous companies offer registered agent services.
- Sign the Articles of Organization: The "Articles of Organization" must be completed and filed. You can get this form on each state's website to create your LLC. It contains all the essential details about your company. Each state charges a different fee for it.
- Create the LLC operating agreement, which describes how the entity will be managed. It is not mandatory, but it is highly recommended.
- Apply for an EIN: For example, to open a business bank account or hire staff, you will need your EIN. A business bank account is essential to keep your personal assets separate from those of the company. It will also make bookkeeping much simpler.
- Meet your annual obligations: Your obligations will vary depending on the state (annual reports, taxes, IRS filings). Failing to meet these responsibilities can lead to fines or the dissolution of the LLC.
How are Single-Member LLCs taxed?
By default, a single-member LLC is taxed the same way as a "sole proprietorship": the IRS does not separate the LLC from its owner. The owner pays income tax on the LLC's earnings on their personal tax return. This is the "Pass-Through Taxation" concept we mentioned earlier.
However, you can also elect to be taxed as:
- A C Corporation: You must file IRS Form 8832 to confirm your tax status and then report all business income on IRS Form 1120. That income will be taxed at the corporate tax rate. For this reason, single-member LLCs rarely choose to file as C corporations.
- An S Corporation: You will need to file IRS Form 2553 and then report all business income on IRS Form 1120S. Like the LLC, being taxed as an S corporation offers pass-through taxation. The difference is that when you are taxed as an S corporation, you don't have to pay "Self-Employment Tax".
In short, you have the final say on how your LLC is taxed, and a tax professional can help you determine what's best for you. But we've broken down the basics for you.
Single-Member LLC vs Sole Proprietorship
When opening a new small business, creating a digital business or starting a side hustle as a freelancer, it's normal to hesitate between opening a single-member LLC or a sole proprietorship. Here we compare the features of each.
| Sole proprietorship | Single-Member LLC | |
|---|---|---|
| Paperwork | requires minimal paperwork. | requires initial paperwork. |
| Cost | No costs or maintenance. | The cost varies by state. There are usually annual fees, but this also depends on the state. |
| Limited liability | There is no separation between your personal assets and expenses and those of your business. You are personally liable for all of your business's debts and obligations. | Business and personal assets are separate. There is limited liability. |
| Members | Cannot add members in the future. | LLCs can add members in the future. |
| Taxes | Pass-through entity. Business income is reported on the personal tax return. | Taxed as a sole proprietorship by default, but can also elect to be taxed as a C-Corp or S-Corp. |
Is it easy to open a Single-Member LLC in the United States?
Opening a Single-Member LLC is a relatively easy process that can be done online and takes about 2 to 3 weeks. Opening a Single-Member LLC in the United States is therefore easy, accessible and fast for anyone in the world.
How much does it cost to open a single-member LLC?
The cost of a Single-Member LLC depends on the state where you decide to open it. First, you have to pay a one-time filing fee, which ranges from about 50 to a few hundred dollars, depending on the state. In many states, you must file an annual report and pay an annual fee or tax. This varies by state but, with the exception of California, ranges from 10 to 300 dollars per year.
Which state is best for opening my single-member LLC?
Some of the best states to form a single-member LLC are Wyoming, Nevada, South Dakota, New Mexico, Delaware and Florida. These states are considered very business-friendly because of their low or zero tax rates.
What types of businesses choose a single-member LLC?
The businesses that most often choose single-member LLCs are new ventures that want to get to market quickly and at a low cost, freelancers, digital entrepreneurs, e-commerce sellers… Basically, they tend to be small digital businesses.
Can I open a single-member LLC if I don't live in the USA?
Anyone over 18 with a valid passport can open a single-member LLC. It is entirely possible to open an LLC as a non-resident.
Is it easy to dissolve a single-member LLC?
To close a single-member LLC, you must meet federal, state and local requirements. You must formally dissolve the company in your state by filing specific legal documents, which differ from state to state. You must also notify your state's tax authority for income tax and sales tax purposes. You must also notify the IRS.
How do I pay myself a salary with a single-member LLC?
The owner of a single-member LLC does not receive a salary or wages from the business. The owner can take money out of the business at any time. This is called an owner's draw.
Written by
Ignacio Navarro
Ignacio Navarro is a Certified Public Accountant, founder of Start Companies and a specialist in U.S. companies for entrepreneurs, freelancers and digital businesses in Latin America. With training in international taxation and studies at UCEMA, he advises non-resident clients on forming and maintaining LLCs, opening bank accounts, invoicing, accounting and taxes. His experience combines tax strategy, compliance and practical vision for operating in the U.S. in a simple, organized and professional way.
