You like to fly solo, you’re a maverick with a business idea and the acumen to get it done.
So when it came time to form your company, you went with a sole proprietorship – no forms, no fees, so you could get right down to it. Now you’re looking to protect your personal assets and increase your business legitimacy, but how?
A single-member limited liability company (or SMLLC) might be your answer. This flexible business structure offers some attractive benefits you don’t get with a sole proprietorship. Keep scrolling and you’ll find all of a single-member LLC’s main advantages and disadvantages, so you can decide for yourself if it’s the best choice for your business.
What Is a Single-Member LLC?
When it comes to ease of operation, the sole proprietorship can’t be beat. There’s no formal process to create one with any state government, and there aren’t any fees associated with creating or maintaining one. It’s just you as the business owner, doing your thing. As great as this might sound, the sole proprietorship also lacks some significant benefits that more formal business structures have.
A single-member LLC’s most important function is providing limited liability protection. This means that if your business is sued, it keeps creditors from pursuing personal assets like your car, house, bank accounts, etc. They will be limited to business assets specifically related to the company itself, such as your business bank accounts and office equipment.
By forming a single-member LLC, you’re establishing the business as a separate entity from you as an individual with distinct assets and operations, taking any business-related liabilities off of yourself.
Why Should I Form a Single-Member LLC?
When you form an SMLLC, your business gains a tremendous amount of legitimacy in the eyes of other businesses, banks, courts, and more. Legally speaking, a sole proprietorship is merely an extension of you as an individual, while an LLC is treated as a separate legal business entity. Why does this matter? Potential customers, business partners, investors, etc. will see your LLC as a legitimate company rather than simply you on your own.
Don’t get us wrong, we’re sure you’re trustworthy, charming, and professional, but having a legal business apart from yourself will often come across as more legitimate, especially if you’re pitching outside investors.
On top of that, a single-member LLC will lock down your unique business name, preventing anyone else in the same state from using it. A sole proprietorship doesn’t require you to register a name, so any title you use is fair game for other businesses.
And there’s still more! Forming an SMLLC gives you authority over how your company is taxed. 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 business income taxes on your personal return.
Why Should I NOT Form a Single-Member LLC?
All that hype sounds great, and it definitely is, which is why so many entrepreneurs choose to form single-member LLCs. It doesn’t mean, however, that it’s a perfect option for every business.
The sole proprietorship does have some advantages over single-member LLCs, starting with the fact that ― as we mentioned earlier ― it doesn’t require a formation process. All you have to do is start working and you’re automatically a sole proprietor, no forms or fees necessary. Sticking with the sole proprietorship can save you some time and hassle in the startup process. And there’s nothing that says you can’t switch it up and form an SMLLC later on.
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?
It doesn’t quite match the ease of starting a sole proprietorship, but getting a single-member LLC off the ground is pretty easy in its own right. Your main task will be to prepare and file your Articles of Organization (called the Certificate of Organization or Certificate of Formation in some states). These documents outline the most important details of your company, including:
- Your company’s name and physical address
- The name and address of your registered agent
- The name(s) of your LLC owner/member(s)
- The identity of your LLC organizer
There are some additional steps when forming multi-member LLCs, but this is usually all you need for SMLLC. Head over to your state’s Secretary of State website and you’ll likely find a standard Articles of Organization form.
In most states, you’ll be able to file your documents by mail, in person, or online. Some states require paper documents, while others only offer online filing. Familiarize yourself with your state’s filing options before getting started.
How Much Does It Cost to Form a Single-Member LLC?
Every state has a filing fee for the Articles of Organization – some are small while others could put a dent in your budget. 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. As you’re outlining your business expenses, it’s important to include your state’s filing fee, because it could make quite a difference.
Want 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?
This is all well and good, but if you’re busy making deals, selling products, and generally hustling, you might not have the time it takes to complete the LLC formation process. Or maybe you find it overwhelming and would be more comfortable if an expert took the reins.
If you would rather not DIY your formation, there are other quality options available. Some entrepreneurs hire a business attorney to form their single-member LLCs, which gives you unrivaled legal expertise, but at a cost. This option can be very expensive, as an attorney will charge hundreds or even thousands of dollars to form your business.
A more accessible option might be to hire an online LLC formation service. There are dozens of companies that handle this process these days, and they can professionally form your LLC at much more affordable rates than an attorney will. These companies are full of LLC experts, so you won’t have to worry about any hiccups in the process either. Interested? Check out one of our favorite single-member LLC service providers:
- ZenBusiness – $39: Yes, this is the LLC service with the best overall value and included baseline features. While they don’t have the extensive track record as the two options below, they’ve formed thousands of businesses so far and very positive online reviews.
- IncFile – $0: IncFile is always at or near the top of our list for LLC formation services because of their totally free LLC service and the fact that they include a full year of registered agent service with any formation. They do all of this without sacrificing customer care, and they receive excellent customer feedback, making IncFile a tremendously well-rounded option.
- Northwest Registered Agent – $225: 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 legally-required government docs). Throw in their personalized, one-on-one customer support, and it makes their slightly higher price tag totally worth it.
You might be perfectly comfortable with the ease and convenience of your sole proprietorship, and that’s completely fine. But a single-member LLC offers some benefits that might be too good to pass up.
While it can be a bit of a hassle, and there are some expenses involved, we think the personal asset protection and legitimacy you’ll gain from a single-member LLC make it worthwhile.
And if this seems overwhelming, remember that there are always options to hire help from experts in the industry. As your business changes and grows, continue evaluating your structural options to stay on top of trends and the best routes for your company.