one of the most popular types of business entities in the united states
is the single member limited liability company this type of llc only has one owner
and a single member llc is usually a business registered
in the state where the company does business the phrase single member is a admission that the llc
only has one owner and that owner is referred to as a member now a single member llc has
so many benefits that are also shared with the normal llc so in this video i'm going to break
down some of those advantages and disadvantages of a single member llc in 2021 while also discussing
the typical operating agreement how taxes work and compare that against sole proprietorship
now let's go ahead and dive in by quickly looking at what a llc is so loc stands for
limited liability company which is simply a type of business entity you can create
when you choose to go into business example of other entities would be a sole proprietorship
limited partnerships general partnerships s corporations and of course c corporations all
of these business entities have their own unique advantages and disadvantages and llcs are pretty
popular and most known for their advantage of separating business assets from personal assets
thus protecting your personal assets from any business related liabilities and for comparison
an llc with multiple owners are typically known as a partnership llc and of course as we mentioned an
llc with one owner is known as a single member llc and sometimes referred to as an smlc now
let's move on and talk about how a single member llc is formed so if you want to start a business
and believe that a limited liability company is the best entity type for you then you'll want
to go to your state's business division and gain information about the specific process that you
need to follow usually this just involves going to your secretary of state website following the
articles of organization or in some states called certification of organization and then pay a
filing fee which usually ranges somewhere between 100 to 200 if you're doing it yourself along with
registering your business in your state you may want to consider filing an operating agreement
for comparison the articles of organization tell the state the new single member llc exists
puts it into the public eye and then shows people how to contact the business should they need to
whereas the operating agreement lays out the most important rules for how the single member llc
will be run generally the operating agreement is not required to form a single member llc
although it is highly recommended that's because a single member llc operating agreement offers
some many great benefits like these so number one it provides rules that will supersede the default
provisions of your state's llc act so if you don't agree with some of the things that your state has
in law then you can use this to serve as your own operating agreement number two it serves as
an additional document that you can show the potential lenders regarding the organization
of your business so if someone wants to invest into your business then you can show them your
operating agreement which gives them some insight to your plans and number three this is particular
for manager managed single member llcs which basically means you are operating the business
which is that you can specifically specify who will take over management of the business in
the event that the owner becomes incapacitated or dies number four the operating agreement provides
an additional affirmation of the separation between your business and from you personally
number five provides a point of reference for how you originally intended to operate the business
now it's important to note that some banks that you want to work with will expect you to have
an operating agreement all right now let's move on and talk about some of those advantages of
a single member llc but really quick before i do if this is your first time here welcome to
our channel i'm sean with life accounting the accounting company that saves people from high
taxes and low profits if you're enjoying the video so far please hit the like button below so that
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every week okay now let's move on to the benefits of a single member llc now some people really
confuse sole proprietorship with a single member llc because they're kind of similar but the single
member llc usually wins that's because a single member loc is a separate business entity from its
owner it is no longer attached to or identifies with the owner for tax or liability purposes
one big benefit of a single member loc is that the llc is recognized as a legitimate business due to
the popularity in the requirement of the llc being included in the business name also when a single
member llc is formed within a state part of the approval process is the business name registration
which then protects any other business in the state from using your business name so those are
some of the major pros of a single member llc but of course a single member loc is not for everyone
and there are definitely some cons now i won't cover that here because crystal did an
exceptional video comparing locs to s-corporations which i'll link up above and sherman also has a
pretty great video on all the benefits of a llc so if you want to learn more about that then i'll
link this one as well however one special thing to note regarding single member llcs is that they are
the most common type of disregarded entity which basically means the irs can ignore it for business
tax purposes and instead collect taxes through the business owner's personal income tax filing
okay so let's dig into that a little bit more and take a look at how a single member llc is taxed
now because single member llcs can be classified as a disregarded entity the responsibility for
paying income taxes are passed through to the owner this way of tax and profits is known as
pass-through taxation which then refers to llcs as pass-through entities the primary business taxes
that you're gonna pay are gonna be federal income taxes and self-employment taxes now to report and
pay federal income taxes as a single member llc business you will need to complete a schedule
c which is a profit or lost business form which is attached to your personal federal tax returns
that you file with the irs now that schedule c will report all your business transactions such
as your income your expenses your assets and your profits that's why it's critical as a business
owner that you're keeping track of all your transactions throughout the year in preparation
for tax season here's a quick example that will make single member llc taxes very clear let's say
that mary is someone who owns a single-member loc part-time and owns a homemade bakery business last
year she earned a total of forty thousand dollars from the business and had expenses totaling ten
thousand dollars for supplies equipment and other items we'll say that mary also earned 25 000 from
her part-time job as a consultant so mary will use the schedule c to show her income and expenses on
her homemade bakery business mary will then attach the schedule c to her personal tax return where
she will report and pay taxes on her combined net income of fifty five thousand dollars which
is thirty thousand dollars from the bakery and twenty five thousand dollars from her part-time
job okay now the last thing you need to know about single-member llc taxes is that you must
pay taxes on all profits whether you distribute them or not the irs will not distinguish
between whether an owner of a single member llc leaves the profits in the business bank account
reinvests the profits in the business or decides to distribute the money as payment to the owner
okay so to the irs none of that matters because it's a disregarded entity the irs only cares about
how much profit the business made and then it will tax those profits the irs likely does this because
it doesn't want single member loc owners to take out different amounts of money out of the business
each year which could lead to manipulation of taxes here's another example let's say
that joe sells car parts and he made a profit of a hundred thousand dollars in 2020 after
expenses joe knows he needs to have at least forty thousand dollars next year to buy more inventory
however even if he leaves the forty thousand dollars in his company account for next year
for those related business expenses he will still have to report and pay taxes on the full 100 000
okay so this is why having a good accountant on your side that can help you with your tax
planning your bookkeeping and your tax preparation is so very important which by the way tax season
is here and we're back in full operations for this tax season so if you or someone you know
needs help with your business taxes then contact us at lifeaccounting.com if you would like to hire
our team for bookkeeping or tax preparation the other tax for single member llcs are
self-employment taxes which is a tax that active business owners will need to pay now the 2021
self-employment tax rate is 15.3 percent that rate is the sum of a 12.4 tax for social security
and a 2.9 tax for medicare the self-employment tax applies to the net earnings of your company
or your profits or your company and you may need to pay self-employment taxes throughout the year
now generally 92.35 of your net earnings from self-employment is subject to self-employment
tax so the irs has given us about a seven percent to eight percent break on our profit once you've
determined how much your net earnings from self-employment are subject to tax
then you can apply to 15.3 tax rate and that should give you your taxes owed now for 2020
only the first 137 700 of earnings were subject to social security portion of the self-employment tax
and in 2021 that amount rose to 142 800 all right now the last thing i want to talk about
is for a sole owner of an llc you will want to have an employer id number even if the business
has no employees that's because most banks require an employee identification number also known as
a ein to open any kind of business account also you may find later that other clients or vendors
may also require your ein to report their income or their expenses from your company getting your
ein is super easy all you need to do is go to the irs website and complete an online application
and then your ein will be emailed and mailed to you i'll put a link in the description below if
you want access to that online application if you need to apply for your own ein so there
you have it i went over everything you need to know about single member llcs going into
2021 so if this information was even a little bit helpful don't forget to like this video
and subscribe for more videos and if you have any questions then please write them in the comments
section below and remember our team is available to hire this tax season well that's it for now
i'm sean and as always thank you so so much for watching and i'll see you in my next video
you