Does Forming an LLC Mean Complicated Accounting? Exploring the Single-Member LLC

Does Forming an LLC Mean Complicated Accounting? Exploring the Single-Member LLC

As a small business owner, you’ve probably thought about protecting yourself by forming a limited liability company (LLC). If you are a sole proprietor, your personal wealth is at risk from your business activities, including debts and lawsuits. You don’t want a bad business deal to hurt your family or wipe out your savings.

But many entrepreneurs are intimidated by the thought of forming an LLC. Doesn’t that require you to file a separate tax return? Don’t you have to keep a separate bank account for your business? You got into business to pursue your dream, not to file paperwork.

Surprisingly, the answer to these questions is “no,” at least for one form of limited liability company: the single-member LLC.

Benefits of the Single-Member LLC

As the name suggests, a single-member LLC is a limited liability company with just one member (duh!). Since you don’t have multiple members, you don’t need to separate your business and personal bank accounts.

The federal government treats a single-member LLC as a “disregarded entity.” That might sound derogatory, but it really means that for tax purposes the IRS sees no distinction between the business and the business owner.

Since all of the business income flows directly to the owner, there is no difference between personal income and business income, and both are covered by the owner’s personal income tax return. That simplifies taxes.

You also don’t need an Employer Identification Number (EIN), which is your federal tax ID. Instead, you use your personal Social Security Number on any tax forms you file, such as a W-9.

Potential Drawbacks of the Single-Member LLC

The catch here is that you still have to deal with your state laws and tax regulations regarding LLCs. Most states treat single-member LLCs as disregarded entities in the same way that the IRS does. However, you may need to pay an annual state franchise tax, which is a flat-rate tax that is usually a few hundred dollars per year.

More importantly not all states have promised to give single-member LLCs the same degree of liability protection that they grant to multi-member LLCs. LLCs were originally intended to be partnerships, and they were granted liability protection to prevent one member of a partnership from being hurt by the actions of another member. But if the partnership has just one member, some states have decided there’s no liability protection.In most U.S. states, this question is still up in the air, waiting for a court case to force the issue. But why take a chance?

You aren’t required to form your single-member LLC in your home state, so a company doing business in, say, Texas could form an LLC in the state of Nevada. Nevada and Wyoming are on record as granting single-member LLCs the same liability protections that they give multi-member LLCs. Note that there is still the chance that a judge may decide that the laws of your home state – and not those of Nevada or Wyoming - apply in a court case. As with all legal matters, we recommend you consult with a business attorney before filing in any state.

Stan Huser is the founder of SunDoc Filings, a California-based company that helps entrepreneurs with their business filings in any U.S. state. A pioneer in document filing and retrieval, Stan started his first company in 1979. You can find Stan at www.SunDocumentFilings.com or on Twitter @SunDocFilings.