- What is a Single-Member LLC
- Does a Single-Member LLC Need an Operating Agreement
- SMLLC vs Sole Proprietorship
- How to Write a Single-Member LLC Operating Agreement
- Single Member LLC Operating Agreement Sample
- Single-Member LLC FAQs
Single-Member LLC Operating Agreement
What is a Single-Member LLC
A single-member LLC (SMLLC) is a company that has only one owner and is usually set up for tax planning and to separate the owner from the SMLLC’s assets and liabilities. Although a multi-member LLC is also an independent legal entity, it has two or more owners that share control of the company.
However, both single-member and multi-member LLCs benefit from similar LLC tax classifications. As both are classified as disregarded entities by the IRS, they do not have to file tax returns on the behalf of the business unless they elect to be taxed as a corporation.
Does a Single-Member LLC Need an Operating Agreement
It is highly recommended for a single-member LLC to have an Operating Agreement, even though it is not absolutely necessary. The purpose of this document is to state the operations of the SMLLC and define the responsibilities of its members.
Although as the sole owner, you will not have to worry about the roles of other members or voting procedures, there are still other reasons to create an SMLLC Operating Agreement.
Additionally, if you're forming an LLC in California, Delaware, Maine, Missouri, or New York you are always required to create an LLC Operating Agreement.
Reasons to Create a Single Member LLC Operating Agreement
Having a well-crafted Operating Agreement helps establish that the SMLLC is operating as a separate entity to yourself. If you are not able to prove this, you may not be able to take advantage of one of the main benefits of LLCs: limited liability.
Limited liability means that you are not personally liable for any debts or legal issues incurred by your company. However, you need to be able to establish this to ensure you are protected; having an Operating Agreement that clearly shows this can help you keep limited liability.
In addition, having an Operating Agreement can help you get funding from potential lenders as it can be used to present them with an idea of your business plan and organization. It also allows you to create your own rules in regard to running your company, as well as who will manage the SMLLC for you if you cannot due to illness or incapacitation.
SMLLC vs Sole Proprietorship
A single-member LLC exists separately from its owners, which means that its owner, is not personally responsible for the company’s debts and liabilities. On the other hand, a sole proprietorship is an unincorporated business owned and run by one person, and there is no legal separation between the business and the business owner.
This means that the owner of a sole proprietorship is responsible for the business’s debts and liabilities. However, both SMLLCs and sole proprietorships are pass-through entities in terms of tax purposes. This means that the business itself doesn’t pay income taxes. Instead, the owner reports business income on a Schedule C which they attach to their personal tax return. This income then gets taxed at a personal income tax rate, which is the same as that of the owner.
|Single Member LLC||Sole Proprietorship|
|Allowed to have employees||No employees allowed without an EIN|
|Can act as a separate entity||Cannot act as a separate entity|
|Can open bank accounts||Can only create bank accounts using a Doing Business As (DBA) or under a personal name|
How to Write a Single-Member LLC Operating Agreement
When you’re looking to set up as a single-member LLC, one of the most important documents you’ll need is an Operating Agreement. It outlines the ownership, management, and financial aspects of your company.
This document can be as detailed or simple as you want.
Information about your company
The first section should cover basic information about the company. It should include:
The company name and address of your principal place of business,
A description of the purpose of the business,
The date you formed your LLC.
Choose a registered agent
You'll need to choose someone who will be your registered agent if there are any legal issues with your company. This person must have an address in the state where your company is incorporated and be available during normal business hours to receive official correspondence on behalf of your company if necessary.
Ownership and Management of the LLC
Single-member LLCs have one member only, who can be an individual or other business entity such as another LLC, corporation, or partnership.
If you're the sole owner, state so on your Operating Agreement. If your company is manager-managed, list those managers and include their responsibilities and compensations.
On this section, you should also set the rules for adding new members.
Describe the capital contributions that each member will make to the company—one member in this case.
Additionally, outline how payment will be handled for those capital contributions, if any.
Determine your successors
Write up dissolution and succession instructions for closing down or transferring ownership of your business.
This might include instructions for selling off business assets or transferring ownership to someone else in the event of something happening to you.
Include a section stating which state laws your LLC will follow.
You should also include a venue selection clause which states where any resulting litigation should take place if there are any disputes between members of the LLC.
Signing your LLC
Make sure to sign and date the Operating Agreement.
Single Member LLC Operating Agreement Sample
If you’re new to managing a single-member LLC, it can help to see a real example of an Operating Agreement before getting started on creating your own. View our sample SMLLC Operating Agreement below to get a good idea of what your document should look like when completed.
Single-Member LLC FAQs
If you’re still wondering about some features that are in an SMLCC Operating Agreement, don’t panic. Find out even more about this kind of business legal document with our answers to some of the most frequently asked questions below.
Can a Single-Member LLC Have Employees?
Yes, a single-member LLC is able to hire employees andcompensatethem for their labor. However, the IRS and courts have ruled that single-member LLCs cannot have owners that are both employees and partners.
How Do Single-Member LLCs Maintain Liability Protection?
How Does a Single-Member LLC Pay Taxes?
The IRS treats single-member LLCs as sole proprietorships for tax purposes; this means that the LLC does not pay taxes and does not have to file a return with the IRS. As the owner of an LLC, you will need to report all profits or losses on Schedule C and submit it with your 1040 tax return.
If you have any employees on your payroll, you will need to withhold payroll taxes and pay them to the IRS in whichever tax structure you choose. An SMLLC also has the option of paying taxes as a corporation. If this option is not selected, your business will be considered a “disregarded entity” for federal tax purposes.