When it comes to doing business, the legal structure of the company plays an important role. It will determine state obligations in terms of taxation and reporting requirements. Should I form an LLC? That is a question that may have entered the mind of many entrepreneurs during the early stages of starting a business.
What It Is
An LLC, which stands for limited liability company, is a structure that is popular among many startups and emerging entrepreneurs. There are different types of LLCs. In terms of ownership, there are two.
The owners of LLCs are called members. If there is more than one member, the company will be a multi-member LLC. This structure is also open to a sole owner. In this case, the company will be a single-member LLC.
Choosing A Single-Member LLC
After determining that the answer to the question “Should I form an LLC?” is yes, the next step is to decide which type suits the company.
For entrepreneurs who want to pursue a business venture, they need to know why a single-member LLC may be the best option.
- Asset Protection – As the name suggests, an LLC offers limited liability protection. That means that the owners will not be personally responsible for the actions, debts, and obligations of the company. So if the company ends up incurring debts or facing a lawsuit, only the money and assets of the LLC will be affected. Creditors cannot have access to the owners’ personal assets. That is because an LLC is a separate entity.
- Flexibility In Taxation – Generally, LLCs enjoy flexibility when it comes to taxation. By default, single-member LLCs are treated as sole proprietorships. They are pass-through entities, so there will be no need to report and pay taxes at a corporate level. However, an LLC can choose to be taxed as a corporation if it is more advantageous and appropriate for the company.
- Business Name – Being the sole owner of the company gives you the freedom to choose what the name will be. Some companies are named after the owner. Single-member LLCs can do the same.
Forming A Single-Member LLC
All states allow the formation of LLCs with one member. However, there may be restrictions and additional requirements for certain circumstances.
For instance, individuals working in the field of medicine, accounting, law, engineering, or architecture among others may not be able to form single-member LLCs. It should be a professional LLC, which requires professional licenses and approval from the relevant state licensing board. Financial service providers such as banks and insurance companies cannot be single-member LLCs as well in most states.
Completing The Process
The exact steps to organize a single-member LLC vary depending on the state. Each one has a set of rules and laws that companies need to abide by.
However, there are certain similarities in the processes. Here are the basic steps a company will have to complete:
- Step 1: Check the availability of the company name.
Most, if not all, states require company names to be distinguishable. That means a business cannot use a name if another entity has already taken it. To prevent issues, companies will have to conduct a business entity name search on the database of the Secretary of State or governing state agency. If an entrepreneur is not yet ready to register the company but wants to secure the name, they can reserve the desired company name with the state. States also impose naming regulations. For LLCs, that means the inclusion of a proper designator. It can be the phrase “Limited Liability Company” or any of its abbreviations. - Step 2: Select a registered agent.
LLCs, whether single-member or multi-member, need to have a registered agent in the state where they are being organized. Each state also has certain qualifications. But, typically, it can be an individual or a commercial registered agent. Check our state-specific articles to find out more about the requirements. - Step 3: Choose a management structure.
Single-member LLCs can choose whether the company will be member-managed or manager-managed. If the member decides to be the one responsible for the company’s activities, then it will be member-managed. If the owner decides to hire a manager to handle day-to-day operations, it will be manager-managed. In some states, the default structure is member-managed. - Step 4: File the appropriate paperwork.
To formalize the registration of the company and legalize its activities, it has to submit formation documents to the state. In most cases, they are called the Articles of Organization. Those come with a filing fee. The requirements and costs will also vary per state. Most states have readily available forms that companies can download and fill out. - Step 5: Prepare an operating agreement.
This paperwork is an internal document. While there is only a sole owner, an operating agreement can help set the procedures on how to run, sell, or close the LLC. It may also include provisions on how to admit new members. - Step 6: Get an Employer Identification Number (EIN).
For single-member LLCs, this step is optional. If the company does not hire employees, is a pass-through entity for taxation purposes, and is not required to pay other business taxes, then it does not have to obtain an EIN. However, it may be necessary if you want to open a business bank account. Some lenders may also ask for it. Businesses can request an EIN from the IRS for free.
Many entrepreneurs wonder, “Should I form an LLC or not?” The answer to that will depend on the circumstances and needs of the company.
Starting an LLC is possible no matter the number of owners. Once you decide that it is time to pursue entrepreneurship, contact DoMyLLC. Our team of experts can assist with handling the state business formation process. We are also authorized to serve as a registered agent in all 50 states.