You’ve decided to go into business, but you’re not sure what sort of business structure you ought to be looking at. Some people have mentioned sole proprietorship, which seems simple enough. As Entrepreneur notes, the sole proprietorship is the simplest business type available to an individual. The drawback of the sole proprietorship is that you and the companies are one and the same. Issues that affect the business, such as legal suits and other matters, also bring your own assets into play as a potential forfeit. The sole proprietorship isn’t the only way for a small business to structure itself. In this article, we’ll learn more about the single-member LLC, and whether it’s a better choice for small business owners.
What Is a Single Member LLC?
The Balance SMB states that a single-member LLC (SMLLC) is similar in many ways to a regular LLC, with the exception that it only has one member on its board of directors. LLCs offer a lot of flexibility to business owners. It also has the added benefit of protecting its members’ personal assets in the case of a legal issue with the company. Thus, an individual who’s a member on an LLC’s board can’t be forced to turn over their private property if the company is found guilty of wrongdoing.
How SMLLCs Are Structured
A single-member LLC is formed and structured along the same lines as a multi-member LLC. Like other LLCs, taxes from your earnings are calculated at the personal income tax level. LLCs themselves don’t have a federal income tax classification and can’t pay income taxes themselves. The government collects taxes from the owners based on what they earn. As mentioned before, limited liability keeps the company’s debts and potential injuries to third-parties within the company’s structure. If the company is liable for payment or prosecution, the LLC’s individual members are exempt from this action.
Forming a Single Member LLC
It’s a relatively simple process to register an SMLLC. You need to file the same articles of organization within a state as if you’re forming a regular LLC. The exception is that there’s only one member stated as the owner of the LLC. There are exceptions to this rule, however. In states with community property laws, a married couple may be in joint ownership of an SMLLC. In such a case, the company is known as a Qualified Joint Venture.
Benefits of a Single-Member LLC
Many business owners that go into the formation of an SMLLC do so because of the inherent benefits that the company structure offers to them. The corporate veil that an LLC provides keeps personal assets safe. In general, if you incorporate an SMLLC, you’ll be getting protection from:
- Tort Liability: if an entity commits wrongdoing against another entity, tort liability comes into play. If one of the employees of the business causes harm to someone else during the course of their employment, then the company is liable. You are not.
- Contractual Liability: If your business has signed a contract to do something, but then later breaches that agreement, the company is liable to pay for that breach of contract. As a member of the LLC, your assets cannot be used to pay for the company’s wrongdoing. Only its own assets can be used for that purpose.
Limitations of the LLC
We have already covered, in-depth, the benefits that an LLC offers to its owners. However, as with all good things, there is a darker side to incorporating an LLC. Among these are:
- No protection from personal torts: If an employee has charges brought against them, you are still liable for any personal torts that arise from harm that comes from your business’s operation.
- No protection from fraudulent liability: if you commit fraud, the LLC cannot protect you from any lawsuit that arises from that activity.
- Personal guarantees stand: If you, as an individual, offer a personal pledge to someone, then that guarantee will remain valid. You are not protected if that guarantee fails to materialize, and the injured party can bring charges against you for failure to meet the obligation.
Is an SMLLC A Good Choice?
While most people won’t have to deal with legal woes from their sole proprietorship, registering an SMLLC offers another level of security to business owners. Additionally, due to the taxes that LLCs don’t pay, business owners only need to pay taxes based on their income from the company. These benefits already put LLCs as a better method of structuring a business than a sole proprietorship. Still, it does take more time to incorporate an LLC, and there is a lot of paperwork in any state you choose to do so. Agents can help you sort out those details for a fee, and even serve as your point of contact within a state. If you expect your business to expand, an SMLLC is an excellent choice for structuring your business.
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