Single-member companies or single-member limited liability companies (SMLLCs) are becoming more popular within the United States. The IRS mentions that an SMLLC only has one owner and is an entity registered to do business where a particular company operates. The term “single-member” specifies that there’s only one owner of the business, as opposed to multi-member LLCs. But how do these SMLLCs function? Is there some particular reason why so many people are trying to get SMLLC status?
The Advantages of Registering as an SMLLC
Both SMLLCs and sole proprietorships are business entities that are fronted by just a single person. Sole proprietorships are usually the way cottage industries and most small businesses start off. However, SMLLCs have some distinct benefits compared to sole proprietorships, including:
o The SMLLC requires registration within a state, and that registration is tied to a business name. The state ensures that no other entity can use the business’s name to do business.
o The SMLLC is a separate entity from its owner and, as a result, is an independent entity when it comes to calculating taxes.
o The SMLLC’s assets are considered separate from the owner’s assets.
These benefits offer some level of protection to owners as compared to a sole proprietorship. In the event of a lawsuit, the winner may only be able to access assets from the company for compensation, for example.
SMLLCs and Taxes
The IRS considers the SMLLC a “disregarded entity.” According to The Balance SMB, a disregarded entity is ignored by the IRS for tax purposes. Instead, the IRS claims taxes from the owner through Schedule C for the owner’s personal income tax filing. However, this doesn’t make it exempt from paying employment taxes if it has employees. In this case, the owner and the SMLLC are considered separate entities for paying taxes to the state.
For federal income tax, the IRS considers taxing the SMLLC as a sole proprietorship, with the owner submitting their tax information in Schedule C, along with other sole proprietorships. The net income that is used considers the business’s earnings and any other earnings the owner may accrue. Owners of SMLLCs are also charged self-employment tax since they are deemed to be employed by themselves. These self-employment taxes include Medicare and social security and are calculated based on the net income the owner makes yearly.
Single-member LLCs also have their own employer identification number (EIN), even if they have zero employees. Banks will typically ask for a business’s EIN when setting up a business account for the owner. If you have an SMLLC as a disregarded entity, you should use your personal tax ID, not the EIN, when filling out the tax forms for your individual taxation.
Is a Single-Member LLC Worth it?
Single-Member Limited Liability Companies offer a wide range of benefits to specific business owners. They are easy to set up, and you can usually find a company willing to draft a one-member company in most states. Some state legislatures even have 0% taxes on businesses registered there, making them an ideal spot to consider when setting up your own SMLLC.