A single-member LLC operating agreement is a form used for recording the details of a newly-formed limited liability company with one (1) member. From how it’s financed to the rules for adding a new member, the form contains a number of fundamental provisions that outline the governance of the organization. Once completed, the form is retained by the entity/owner; operating agreements do not need to be filed with the secretary of state.
A single-member LLC is a type of business entity that is a common alternative to a sole-proprietorship. A single-member LLC provides several benefits to its owner, mainly that the owner is a separate entity to that of the business itself (shielding them from most liability). Come tax time, the entity is known as a “disregarded entity.” This means that the IRS “ignores” the company itself, requiring the LLC’s owner to pass the entity’s income and expenses through their own personal tax return, in the form of a Schedule C.
The process for starting a single-member LLC is very similar to that of a multi-member LLC. The process may vary from state to state, but generally consists of the following steps:
The first step in forming an LLC is to name it. The owner can utilize their state’s entity search to find names that suit their business. The name can be virtually anything, as long as it is not prohibited by state law. Most state statutes require that entities put “LLC,” “L.L.C.,” “Ltd. Liability Co.,” or other similar words/abbreviations at the end of the company name. If the owner isn’t ready to file their new entity but they found the perfect name, they can reserve the name (typically for a fee).
The registered agent can be almost any person or entity, as long as they live in the state in which the LLC is filed, they’re available during normal business hours, and they’re at least 18 (applies only to individuals). LLC members commonly opt to nominate a registered agent other than themselves as it gives them a means of choosing a person that will always be present to receive lawsuits, documents, and other important communications.
The Articles of Organization (goes by different names depending on the state) is what must be filed with the state in order for them to recognize that the LLC is real and valid. This can often be filed online for a fee.
While rarely a state requirement, this step is one of the most important for ensuring the owner properly outlines their purpose, rules of governance, and other important factors of an LLC. Some of the topics covered in the operating agreement include profits/losses, distributions, new member additions, compensation (salaries), management, and much more.
This step is required for entities that intend to hire employees, open a business bank account, and more. Known as an “Employer Identification Number” an EIN is a completely unique designator given to a business. It is commonly compared to a person’s social security number (SSN). One can be obtained relatively easily through the IRS website.
While both sole proprietorships and LLCs have a single owner and are great options for those looking to open a small business, they differ in several major ways.
Taxes
In both an LLC and a sole proprietorship, taxes pass through the entity straight to the owner of the business, requiring them to show any income tax as an attachment to their personal tax return with a Schedule C tax form. However, unlike sole proprietorships, an LLC can opt for different tax treatments, allowing them to be taxed as a C or S corporation (as long as they meet all necessary requirements).
Liability
One of the most important differences between single-member LLCs and sole proprietorships is that the latter has no legal separation between the business and the person that owns it. Should the entity face a lawsuit, the owner is on the line for paying off any judgments. Because an LLC is a separate legal entity, it acts as a “shield” for the owner, protecting them from having to pay debts and lawsuits out of their own pocket. However, the protections an LLC offers only work if the owner is running their entity in full compliance with the law AND they don’t mix business and personal expenses.
Regulations / Compliance
Sole proprietorships may have the advantage over LLCs in that there are few restrictions placed on the owner (due to them being a single entity in the eyes of the state). The owner of a single-member LLC needs to file an annual report with the state, keep all business expenses separate, as well as abide by state-specific restrictions regarding operation.
