Historically, businesses with a single owner have been structured as either sole proprietorships or single-shareholder corporations. But now, due to recent developments that have made them available in every state, the single-member LLC has become the go-to business structure for single-owner businesses.
Limited Liability Companies (LLCs) are increasingly popular legal structures for small businesses because they combine the pass-through tax advantages and flexible management of a sole proprietorship or partnership with the limited liability of a corporation. LLCs are also popular because they offer small business owners other less-talked-about advantages, most notably:
LLCs come in several different varieties, which primarily affect how they are treated for tax purposes. The two varieties most pertinent to this article are:
Other than the number members they each have, there are other differences between a single-member LLC and multi-member LLC, most notably:
For taxation purposes, a single-member LLC is not treated as a separate, legal entity from its owner. What this means is that the LLC does not have to file a separate tax return, as its income is reported on its owner's 1040 tax return.
Unlike a single-member LLC, a multi-member LLC is considered a separate legal entity in terms of filing taxes. This simply means that while the LLC does not pay income taxes itself, it must still file an informational return with the IRS via form 1065. This is to allow the IRS to determine if the LLC is reporting its income correctly.
A multi-member LLC must also provide the IRS and each of its members with a Schedule K-1, which details each member's share of the LLCs profits and losses, which must then be reported on each member's individual tax return.
Thus, one of the biggest advantages of a single-member LLC over a multi-member LLC is the ease of reporting the LLC’s profits and losses and the fact that you do not have to make any separate filing with the IRS.
Other than the number of owners and how they are treated for tax purposes, perhaps the most important difference between a single-member LLC and a multi-member LLC has to do with the level of personal liability protection they provide their owners.
An LLC's primary purpose is to create a barrier between the debts and liabilities of its members and the personal assets of its owners. This can mean prohibiting creditors from accessing a member's personal belongings to satisfy debts belonging to the LLC, or prohibiting a creditor from accessing the LLC's assets to satisfy a member's personal debt.
This barrier is commonly referred to as the corporate veil and is an aspect of both single-member and multi-member LLCs. However, courts sometimes allow creditors to pierce this corporate veil to satisfy certain types of debts. Most importantly, a court is more likely to allow a creditor to pierce the corporate veil between a single-member LLC and its owner, than that of a multi-member LLC and its owners.
If you are the sole owner of a business and do not give it a formal business structure, it will be considered a sole proprietorship by default. As such, the debts of your business will also be considered your personal debts. You are also personally liable for any injuries, losses, or damage to property that is caused by your business.
On the other hand, if you legally structure your single-owner business as a single-member LLC, generally speaking, you will avoid being held personally liable for any debts, injuries, or property damages caused by your business. With this in mind, forming a single-member LLC, rather than a sole proprietorship, may be better for any business that carries even the slightest risk of liability.
Besides, if you leave your single-owner business as a sole proprietorship, instead of organizing it as an LLC, you will still have to pay the same amount in taxes, keep the same records, and perform the same amount of work to maintain your business. But, you will not enjoy any personal liability protection and your personal assets (your home, bank account, investment, etc.) can be lost to debts, lawsuits, or judgments incurred by the business.
Any advantages a single-member LLC provides over a sole proprietorship must be weighed against the additional costs and formalities required for operating your business as an LLC.
For help with determining if a single-member LLC is the right business structure for your single-owner business in Texas, consult with an experienced Texas business attorney. Call us today to arrange a free consultation and to learn exactly how we can help.
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