A lot of sole proprietors wanting to grow their business prefer the LLC business structure.

But search about LLCs, and you will come across terms such as “single member LLC” and “multi-member LLCs” very commonly.

What is a single-member LLC or SMLLC? How is it different from other business structures?

This post will answer all of these questions to help you understand LLCs better.

What is a Single-Member LLC (SMLLC)?

As the name suggests, a single-member LLC or Limited Liability Company is a business entity with a single owner (known as a member). The SMLLC functions as a legal entity of its own which is separate from its owner.

As it is an LLC, it offers some level of personal liability protection which the LLC business structure is well-known for.

Taxation of SMLLC

Single-member LLCs get the option to select the taxation structure of a disregarded entity or a corporation. If it chooses the former, its taxation will be similar to a sole proprietorship. With this tax structure, the SMLLC will report all the business income through the personal income tax of the owner.

SMLLC taxation as a corporation is generally an option for owners who have very high taxable income, including the net income of their LLC. In such cases, taxation as a corporation can help yield lower taxes.

But with the corporation tax structure, the owner will also be subject to double taxation. So, select the corporate structure only if the tax savings are significant. Most SMLLCs generally prefer the disregarded entity structure.

Other Differences Between SMLLC and Corporation

There are some significant differences between the activities of an SMLLC owner and corporation owner. Two of the biggest differences are as follows-

• The SMLLC owner is not an employee and does not receive a salary from the SMLLC. Instead, he/she can take money from the business at any time. The same is not true for corporation owners.
  
• Similarly, the SMLLC owner can put his/her money in the business at any time. The personal funds of the owner can be used for the same. Corporation owners cannot do this.

Difference Between SMLLC and Sole Proprietorship

A sole proprietorship and SMLLC are both sole entities. However, SMLLC business structure is known to offer some significant benefits over a sole proprietorship. For instance-

• SMLLC or LLC for that matter is a business structure separate from the owner. It is not identified or attached to the owner for liability or taxes.
• SMLLC offers personal liability protection which sole proprietorship does not.
• SMLLCs are legitimate business entities which need “LLC” in their business name.
• As SMLLCs are legitimate business entities, they are generally more credible than sole proprietorships. This makes them a better option for clients and investors.

Disadvantages of SMLLC

While SMLLCs offer some great benefits over sole proprietorship and corporation, there are some drawbacks too.

For instance, the personal liability protection offered by SMLLC has its limitations. There are several cases in which the personal assets of the owner can still be at risk if someone files a lawsuit against the SMLLC.

Also, there is a lot of additional paperwork with LLCs or SMLLCs as you will have to file annual reports. Paperwork is considerably lower with a sole proprietorship. However, it is not as complex as a corporation.

Unlike a corporation, there is no need for an SMLLC to have shareholders and board of directors. This makes them less formal and affects their business credibility too. As a result, a lot of SMLLCs struggle when it comes to raising equity capital or applying for credit.

Forming an SMLLC

If you are planning to establish an SMLLC, you should contact the business division of your department of state. While the requirements generally vary between states, most states will require you to-

• Select an SMLLC name
• File Articles of Organization by paying a filing fee
• Create Operating Agreement
• Publish public notice
• Apply for permits and licenses

Conclusion

As you can see, a single-member LLC offers some great benefits in comparison with other business structures like a corporation or sole proprietorship. While there are some drawbacks too, the benefits are considerably more valuable.

If you want to take your business a step forward or wish to register a new company, now you can decide whether SMLLC is the right choice for you. You can also look for professional help to make the right business decision.

The post What is a Single-Member LLC (SMLLC)? appeared first on .

source https://businessentity.org/learning-center/what-is-a-single-member-llc-smllc/