What Is a Single-Member LLC?
Do you own a sole proprietorship, but you’d like to acquire personal asset protection? Are you looking for a way to increase the legitimacy of your single-person business?
If you answered yes to either of these questions, a single-member limited liability company might be the perfect fit for your business. But how do you form one, and why is it a preferable option to operating a sole proprietorship?
In this article, we’ll go over the main advantages and disadvantages of a single-member LLC compared to a sole proprietorship. We’re confident that by the time you’re done reading, you’ll know which one is the best choice for your business.
What Is a Single-Member LLC?
The sole proprietorship is such a popular business type because it couldn’t be easier or less expensive to operate. There’s no formal process to create one with any state government, and there aren’t any fees associated with creating or maintaining them either. However, the sole proprietorship also lacks some significant benefits that more formal business structures have.
Most importantly, the single-member LLC (or SMLLC for short) provides limited liability protection. This means that if your business is sued, creditors may not pursue your personal assets, like your car, house, bank accounts, etc. They will be limited to a pursuit of your business assets specifically related to your company itself, such as your business bank accounts and office equipment.
In short, a single-member LLC is a more formal business structure than a sole proprietorship, and it provides some very valuable financial protections as well.
Why Should I Form a Single-Member LLC?
A major benefit of forming an SMLLC is that your business gains a tremendous amount of legitimacy. Compared to a sole proprietorship, which legally speaking is merely an extension of you as an individual, an LLC is not just treated differently as a legal business entity, but it is also seen by potential customers as being a more trustworthy and legitimate enterprise.
With a single-member LLC, you can lock down your unique business name, which prevents anyone else in the same state from using your name. Also, if you’re interested in pursuing outside investment in your business, it’s far easier to attract investors to an LLC than it is to a sole proprietorship.
Another attractive aspect of the SMLLC is the fact that you’re given flexible options for taxation. Instead of being beholden to the double taxation model of a corporation ― in which profits are taxed on the corporate level, and again on your personal tax return ― an LLC can elect to have their profits or losses “passed through” the business itself, which means you only pay taxes for this income on your personal return.
Why Should I NOT Form a Single-Member LLC?
The sole proprietorship does have some advantages over single-member LLCs, starting with the fact that ― as we mentioned briefly earlier ― there is no formation process for a sole proprietorship. All you have to do is start working and you’re automatically a sole proprietor by default. Clearly, sticking with the sole proprietorship can save you some time and hassle.
Along these same lines, there are no fees or ongoing compliance costs involved with sole proprietorships. Because the business is an extension of you as a person, you aren’t subject to any of the fees involved with SMLLCs. Seeing as all LLCs are required to pay startup fees and most of them also have ongoing maintenance fees, it’s cheaper to run a sole proprietorship.
How Do I Form a Single-Member LLC?
The main step for single-member LLC formation is the preparation and filing of your articles of organization. These documents outline the most important details of your company, including the following:
- Your company’s name and physical address
- Name and address of your registered agent
- Name(s) of your LLC owner/member(s)
- Identity of your LLC organizer
While there are some additional steps to the articles of organization with multi-member LLCs, this is usually all you need to form an SMLLC. Most states have templates available to help you easily fill out your articles of organization, but in some other states you’ll have to draft these documents yourself.
How Much Does It Cost to Form a Single-Member LLC?
Every state has a filing fee for your articles of organization, and they can vary quite a bit from state to state. In some states like Kentucky and Arkansas, you can form a single-member LLC for less than $50. In other states like Massachusetts and Tennessee, this fee amounts to several hundred dollars.
Would you like a specific breakdown of the expenses in your state? Check out our guide to LLC formation costs in all 50 states!
Can I Hire Someone to Form My Single-Member LLC?
Of course, if you would rather not DIY your formation, there are other options available to you. Some entrepreneurs hire a business attorney to form their single-member LLCs, which can be a good choice if you place a high value on the peace of mind associated with a lawyer’s expertise. However, this option can also be very expensive, as an attorney will charge hundreds or even thousands of dollars to form your business.
A more affordable option is to hire an online LLC formation service to create your SMLLC. There are dozens of companies offering this service these days, and they can provide a professionally formed LLC at much more affordable rates than attorneys do. If you’re interested in this option, check out one of our favorite single-member LLC service providers:
- IncFile – $49: IncFile is always at or near the top of our list for LLC formation services. They have great price points, and they include a full year of registered agent service with any formation. They also receive excellent customer feedback, making IncFile a tremendously well-rounded option.
- Northwest Registered Agent – $79: Like IncFile, Northwest includes a year of registered agent service, but even better is the fact that they’re the only major service provider that locally scans every document they receive as your registered agent (most competitors only scan the government docs that they’re legally required to). Throw in their personalized, one-on-one customer support, and they make their slightly higher price tag worthwhile.
- LegalZoom – $149: While their high price points are obviously unappealing, LegalZoom’s awesome brand power and high customer volume are major advantages compared to their competitors. They also have a 100% satisfaction guarantee and some of the longest customer service hours in the industry.
There’s a lot to consider when it comes to choosing between the sole proprietorship and the single-member LLC. While it can be a bit of a hassle, and there are some expenses involved, for the most part we think it’s worthwhile to form an SMLLC, because of the personal asset protection and formalities/legitimacy you’ll gain with the LLC business structure.
Whether you choose to pursue a sole proprietorship or a single-member LLC ― and whether you want to try the DIY route or hire a professional to handle your formation ― we wish you the very best of luck with your business ventures!