A single-member limited liability company (SMLLC) is a single-owner business that offers limited liability protection and tax benefits. An SMLLC can be taxed as either a sole proprietor or a corporation. The sole member has executive voting rights and controls operations and decision-making without having to involve partners or shareholders. One key advantage is the ‘corporate veil’, which separates business assets from personal assets.
Single-Member LLC vs. Multi-Member LLC
The main difference between an SMLLC and a multi-member LLC (MMLLC) is the number of owners and the impact on control and taxation. SMLLCs are operated by one individual, allowing for complete control, while MMLLCs have two or more owners sharing control. For tax purposes, the IRS considers SMLLCs as sole proprietorships, reporting all income and expenses on the owner’s personal tax return, unless they opt to be taxed as a corporation. In contrast, MMLLCs are typically taxed as partnerships.
Single-Member LLC vs. Sole Proprietorship
The significant distinction between an SMLLC and a sole proprietorship is the liability protection provided by the SMLLC. While both are similar in that they have a single owner, a sole proprietorship does not protect the individual’s personal assets from business liabilities. An SMLLC offers personal liability protection and pass-through taxation, meaning profits and losses pass through to the owner’s individual tax return.
Disregarded Entity Status
An SMLLC with disregarded entity status is not recognized as a separate entity for federal tax purposes. This means all profits and losses are reported on the owner’s tax returns. Despite this tax treatment, an SMLLC is still a separate legal entity in terms of liability, providing asset protection analogous to what is offered by MMLLCs. When forming an SMLLC, entrepreneurs must comply with state-specific guidelines but do not need to complete any special federal forms to establish the disregarded entity status.