How to Structure a Single Member LLC
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A corporation isn't required to have a full team of c-suite executives and large, formal shareholder meetings. It is possible to be the sole shareholder, director and officer for your corporation. States also allow you to form a single member Limited Liability Company (LLC) -- which can be a good option for those solo owners who want to avoid some of the corporate formalities.
In this article, we’ll review the keys steps involved in forming and maintaining a single owner LLC: including forming the LLC, selecting the management structure and staying compliant with state rules so you don’t lose your liability protection.
The basic structure of the LLC.
Corporations must have a board of directors, as well as officers (president, treasurer, etc.). LLCs offer a lot more choice and flexibility. With an LLC, you can choose to operate like a corporation and set up officers and directors, Or, you can operate with much less formality and name a single person (yourself) as the principle.
1. Choose your management structure.
There are two forms of management for LLCs: member-managed and manager-managed. This is true whether you have a multi-member LLC or single-member LLC. In most states, if you don’t specify your management structure in your Articles of Organization or Operating Agreement, you’ll be operating as a member-managed LLC by default.
What’s the difference between member-managed and manager-managed? It boils down to the relationship between ownership and management. In a member-managed LLC, the owner is the manager. In a manager-managed LLC, you formally create a manager role that is separate from ownership. In this case, the manager typically has the authority to handle the day to day operations for the LLC, such as hiring/firing employees, writing checks, entering business contracts. But the owners may have sole authority for higher level decisions such as getting a loan, acquiring another business, etc.
In many cases, most single-member LLCs opt to be member-managed. But there are some situations where you’d want to create a manager-managed single-member LLC. For example, if your LLC owns retail stores, you may want to appoint a manager who has the authority to run the store, manage employees, handle inventory, etc. To set up a manager-managed LLC, you’ll need to spell this out in your Articles of Organization, as well as define the specific responsibilities in your Operating Agreement.
2. Choose your title.
In a single-member LLC, you have the freedom to choose whatever title best reflects your role. Unlike a corporation, you don’t have to worry about naming specific titles like President and treasurer. You can call yourself the president, principal, managing partner, founding director, chief of technology, marketing director… whatever works best for you.
3. Create an Operating Agreement.
The Operating Agreement isn’t required for setting up an LLC, and if you’re forming an LLC on your own, you’re probably wondering what’s the point of creating a contract for yourself? Creating an Operating Agreement for a single-member LLC is a great opportunity to make sure you’ve thought through all the logistical details -- such as how the LLC will be funded, who is responsible for making decisions and what happens to the business should you become incapacitated? The other advantage of creating an Operating Agreement, is that it provides evidence of the separation between your personal and business affairs. This helps to keep up your corporate veil and protect your personal assets.
Single member LLC taxes.
Filing taxes as a single member LLC is much simpler than corporations or multiple manager LLCs. Most single member LLCs are considered “disregarded entities”, meaning that you’ll be taxed like a sole proprietorship. In this case, the business won’t need to file a separate tax return, but you will report your income and expenses on Schedule C of your individual tax return. This allows you to avoid the issue of double taxation that can occur with a C Corporation and allows you to simplify tax filings as much as possible. Keep in mind that the single member LLC, like traditional multi-member LLCs, can elect to be taxed as a corporation should that route be preferable.
Single-member LLCs and liability.
Personal liability protection is one of the key advantages of the LLC. In many cases, members of an LLC aren’t personally liable for the debts of the business. If your LLC is sued or can’t pay its debts, your personal savings and assets aren’t at risk. However, there are some important distinctions to be aware of when it comes to single-member LLCs.
Liability protection typically protects against contract suits (e.g. when the business can’t live up to its end of a contract). It also protects you against the actions of another owner (e.g. your business partner did something wrong). However, liability protection typically doesn’t protect against tort lawsuits related to your own actions. So, if you’re performing some kind of work for the business and your actions harm someone, you can still be personally liable.
In addition, limited liability requires that the business and individual are two separate entities. As a single-member LLC, you are more likely to blur your personal and business finances, and a plaintiff may be able to pierce your “corporate veil.” For this reason, if you are concerned about minimizing your personal liability, be sure to keep your business finances and accounts sharply separated from your personal finances.
The bottom line.
The bottom line is that you can set up a single-member LLC for your business. It’s easy to do and there are fewer formalities involved compared with a corporation. Just be sure to understand how liability works and follow every step to maintain the LLC throughout the year, such as keeping your personal and business finances separate and filing your annual report (if your state requires one).