A single-member limited liability company (SMLLC) is an alternative to sole proprietorship for small businesses. The separation between an SMLLC and its owner gives the owner personal protection from the liability of the company. The SMLLC can be taxed as a corporation or as a disregarded entity.
Registration and Taxation
When registering an LLC, the business name is automatically registered, as well. Obtaining an EIN to open a business bank account is required for both sole proprietors and single-member LLCs. By default, a single-member LLC is considered a disregarded entity. Therefore, business tax obligations flow through to the LLC owner.
Comparing SMLLC and Sole Proprietorship
The main difference between a single-member LLC and a sole proprietorship is that an LLC offers limited liability protection to its owners. In a sole proprietorship, the owner is personally responsible for any debts or liabilities. Also, the IRS treats them differently for tax purposes. Single-member LLCs report business income and expenses on the owner’s tax return, while a sole proprietorship is taxed separately.
A single-member LLC offers liability protection and tax flexibility. It requires more paperwork but protects personal assets. In contrast, a sole proprietorship is relatively easy to set up, but it does not establish the business as separate from the owner.
Autonomy and Management
If you want complete autonomy, a sole proprietorship or single-member LLC is the best choice, allowing you to manage operations and resources independently. However, you also shoulder losses alone. With an LLC, you won’t pay business income tax but will pay self-employment tax.