If you run your own business as the sole owner, then you're what's known as an "independent contractor." Perhaps you make baby clothes out of your home and sell them on an e-commerce website like Etsy. Or maybe you rent out a shop re-finishing old furniture. Independent contractors are usually organized as sole proprietorships or as single-member limited liability companies (SMLLCs).
If you're the sole owner of your business and you haven't filed any paperwork with your state to incorporate your business, then you—like millions of others—have a sole proprietorship. While a sole proprietorship works for many entrepreneurs, you should consider the benefits of forming an SMLLC. The paperwork might be well worth the legal protections you'll gain.
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You might be familiar with a limited liability company (LLC). While an LLC is typically associated with a group of business owners (who form what's sometimes called a "multi-member LLC"), single business owners can also take advantage of this business structure. When there's a single owner of an LLC, it's called a "single-member LLC."
Every state allows you to form an LLC with just one member (or owner). However, in most states, some professions face restrictions or additional requirements. More specifically, you might not be allowed to form an SMLLC—or a standard LLC—in your state if you work in the following professional fields:
Additionally, some businesses that provide financial services—such as banks and insurance companies—aren't allowed to form an SMLLC (or any LLC). However, unless you're looking at forming an SMLLC as a subsidiary of a financial services corporation (in which case you'll need significant, expert legal and accounting assistance), you're not likely to encounter this particular issue.
If you can't form a standard SMLLC because of your profession, you'll likely need to create what most states call a "professional limited liability company" (PLLC) instead. Check your state's laws on LLCs and PLLCs to find out which entity you're allowed to form, if either. For example, California doesn't permit PLLCs; if you're in California, your option is to form a professional corporation (PC) instead.
The specific professions that qualify for PLLCs vary from state to state. For example, New York lists a number of relevant professions, such as podiatry, acupuncture, massage therapy, and interior design that qualify for PLLCs. (But in New York, a PLLC is called a "professional service LLC.")
Generally, to form a PLLC you must:
You'll also probably need to carry a sufficient amount of malpractice insurance—the limited liability protection of a single-member PLLC will not protect you from your own professional malpractice. However, as mentioned earlier, banks and insurance companies will usually need to opt to form PCs instead of PLLCs.
Business owners typically form an LLC when they want to take advantage of its limited liability protections while still being involved in the day-to-day business operations. For someone that solely owns and manages their business, these benefits are even more useful.
Because single owners are usually choosing between forming a sole proprietorship and an SMLLC, we'll look at the pros and cons of SMLLCs as compared to sole proprietorships.
An SMLLC offers the same benefits as a multi-member LLC:
If you want to form an SMLLC, you'll have to face some downsides:
Forming an SMLLC requires almost the same procedure as forming an LLC. Generally, you should take the following steps:
Every business is different and you might have a longer to-do list. For instance, you might need to create a business plan, find a location to open shop, and hire employees. For more information, read the steps to starting your own business.
Once you start your SMLLC, don't forget to maintain all of its licenses, registrations, and permits. You'll also probably need to:
For more information, read our article on operating your SMLLC.
If you're already in the groove of running your business, it can be hard to take a step back to restructure it. Even when you're starting out, it can be easier to dive right into selling your goods or services instead of taking time to file paperwork and create internal documents. But it's important to set up your business in a way that can benefit you in the long term as early as you can. If you have experience starting a business or your business is relatively easy to set up (for instance, you don't have any employees or complicated regulations to follow), then you can probably form your SMLLC on your own.
But if you're entering a highly regulated field or you've hired or are considering hiring employees, you should talk to a small business attorney licensed in your state. They can walk you through your state's LLC laws, draft your operating agreement, create employment policies, and navigate license and permit processes. A business lawyer can help you through the entire formation process, or you can consult an attorney with specific experience only when needed. For instance, if you only need help registering for taxes, you can consult a tax attorney. Similarly, if you need help with hiring employees, you can speak with an employment lawyer.
If you're interested in forming an SMLLC but have more questions, check out our frequently asked questions (FAQ) below. You can also visit our section on SMLLCs for more information.
Should I form a single-member LLC or a sole proprietorship?
Whether you decide to form an SMLLC or a sole proprietorship depends on a multitude of factors. If you don't want to file any additional paperwork or pay filing fees and you want to be taxed on your individual return, then a sole proprietorship could be the best option for you. But if you want to limit your liability and you're interested in being taxed as a corporation or S corporation, then the extra paperwork and fees might be worth it to form an SMLLC.
To learn more about the pros and cons of these business structures, read about sole proprietorships vs. LLCs.
How much does it cost to start a single-member LLC?
The costs of starting an SMLLC are very similar to the costs of starting an LLC. You'll need to pay initial fees, such as filing fees with your articles of organization. You might also have to pay fees associated with business licenses and permits. You also might need to pay ongoing costs including annual report fees, taxes, and license renewal fees.
You'll also want to contribute some money up front to fund your SMLLC. Investing money in your SMLLC can not only cover initial costs, but it can also help your business appear to be separate from you as a person.
For more about the importance of contributing initial capital, read about first investments in an SMLLC.
Can a single-member LLC be manager-managed?
Yes. Most SMLLCs are member-managed because solo owners usually want to both own and manage their businesses. But you can choose to be manager-managed. If you choose this option, then you can appoint yourself or someone else as the manager.
For more information, read about manager-managed SMLLCs.
How do I dissolve a single-member LLC?
The steps to dissolving and winding up an SMLLC are almost identical to the steps to dissolving an LLC. You'll need to file official dissolution paperwork with your state. You'll also need to inform creditors of your dissolution and settle your debts. Because you're the sole owner, you can distribute any remaining assets to yourself. Don't forget to cancel any active licenses, registrations, or permits for your business.
For additional guidance, see how to dissolve an LLC.
Can a single-member LLC have employees?
Yes. An SMLLC, like a sole proprietorship, can have employees. But if any of those employees (or anyone else) becomes an owner, then you no longer have an SMLLC.
For tips, read our article on hiring your first employee.
Can I elect to be taxed as an S corporation?
Yes. To be taxed as an S corporation, you'll first need to elect to be taxed as a standard corporation (or C corporation). Then you can file an IRS Form 2553, Election by a Small Business Corporation to elect to be taxed as an S corporation. An S corporation, like an LLC and SMLLC, is considered a pass-through tax entity. But, unlike other pass-through entities, being taxed as an S corporation will help you avoid paying self-employment taxes.
For more about the process, read our article on electing S corporation tax status for an SMLLC.