A single-member limited liability company (LLC) is one of the most common business entity forms used by small businesses and entrepreneurs. What is a single-member LLC, and why might it be right for your business? This article explains.
A single-member LLC is a type of business entity. It is formed pursuant to state law. Every state permits LLCs to be organized under their laws, although if you are doing business in North Carolina, forming your LLC under the North Carolina LLC Act is commonly done. The North Carolina LLC Act was enacted at North Carolina General Statutes § 75D, et al.
If you are a sole proprietor (sometimes called a solopreneur), you do not need to associate with other people to form your business. You can own the entire business when incorporating using a single-member LLC. You can file the paperwork required with the Secretary of State, choose a business name, and begin doing business under that name.
Why use an LLC? There are a number of advantages to using a single-member LLC over of a sole proprietorship, and even over a corporation.
Recognition
Having an LLC makes your business stand out over sole proprietorships. With the “LLC” after your business name, potential customers and clients know that you take your business seriously, so they take you seriously. They know that you have taken steps to formalize your endeavor beyond just being a guy or gal with a passion.
Flexibility
An LLC is the most flexible type of business entity form. If you want to take on partners when the time comes, you can transfer or sell part of your interest in the LLC. You do not need to have annual shareholder meetings like corporations do, nor do you have to do the kind of recordkeeping required with corporations.
Tax Advantages
A single-member LLC has tax advantages, too. Though some corporations are taxed at both the corporate level and the individual level, LLCs are taxed only at the individual level. This is called “pass-through” taxation. Furthermore, an LLC can choose to be taxed as a sole proprietorship, a C corporation, or an S corporation. This flexibility allows you and your accountant to choose the best tax structure to minimize your tax liability.
The fees to form a single-member LLC are relatively low. To form an LLC in North Carolina costs $125, and there is an annual fee of $200 to stay in good standing with the Secretary of State.
Don’t forget the issue of individual liability. If you are a sole proprietor and you have a legal dispute with a customer or vendor, or if the business fails, you will be personally liable for any business debts. This is potentially catastrophic and could, in the worst-case scenario, cause you to need to file for bankruptcy.
With a single-member LLC, however, you have insulation from personal liability. Only the LLC is liable for the company’s debts. This means that if the company runs into problems, you can walk away without it affecting your home or your personal savings.
A final tip for entrepreneurs forming a single-member LLC is that they may want to give a small percentage interest in the company to a close family member. If a creditor obtains a judgment against you personally (not against the LLC), they may be able to force you to sell the company. However, if you take on an additional member – probably, just giving a 1% interest to your spouse or family member – the creditor probably cannot force you to sell the company.
In contrast, if you have a corporation, you own it via its stock. If a creditor gets a judgment against you personally, they can force the sale of the stock, meaning that you lose your company.
As you can see, a single-member LLC offers many advantages over both a sole proprietorship and a corporation in terms of both its flexibility and its protection from creditors.
If you would like to learn more about how a single-member LLC might be right for you, get in touch with us at Fairview Law for a consultation.
DYE CULIK PC is a Charlotte, North Carolina business law firm that represents business owners, entrepreneurs, and franchisees in all stages of the business, from formation to litigation. Contact us at 980-999-3557 to see how we can help your business succeed.