There are many factors to consider when starting a new small business, setting up an online store, offering services as a side gig, or any other type of business. You may question which business entity is best for you. When facing this decision you will want to consider whether a Single Member Limited Liability Company (LLC) or Sole Proprietorship is the best formation.
An LLC is a formally recognized business entity formed within a state and can have one or more owners (known as members). A single-member LLC has only one member.
One of the most straightforward benefits to an LLC is the limited liability. An LLC is considered a separate entity from you, meaning if your LLC business goes bankrupt or is sued, your personal assets outside of the LLC are normally protected from creditors and lawsuits.
Single member LLCs have more paperwork when filing. We have it broken down into six steps that are detailed out on our Limited Liability Company page.
With a single-member LLC, you may be required to do some annual record keeping to keep the LLC active:
The IRS states if a single-member LLC does not choose to be taxed as a corporation, it is considered a "disregarded entity". This means the LLC is taxed the same federally. However, an LLC may claim the tax deductions for the business (unless an LLC elects to be treated as a C corporation or S Corporation for tax purposes).
Single Member LLC Tax Documents:
When you work for an employer you probably see money taken out of each paycheck for social security and medicare taxes, also known as Federal Insurance Contributions Act (FICA) tax. When you have an employer, you’re actually only paying half of that tax as an employee and your employer is paying the other half.
As a single member LLC member or sole proprietor, you must pay the full amount. The self employment tax is 15.3% which as of 2022 is broken down into:
Check the IRS website for annual net income threshold amounts. For more on self-employment taxes, we suggest speaking with a CPA or Tax Professional.
Self employed people, as you can see, still have to pay FICA, federal, state and local taxes. Unlike being employed, where the employer takes money out every pay period, a self employed individual may not have that option. This doesn’t mean a self employed person has the ability of waiting until the tax filing deadline to pay all their taxes.
The IRS wants to be paid now rather than later. It is recommended that single member LLCs and sole proprietors make estimated tax payments in four quarterly payments spread out over the year. These payments are called “estimated taxes” and are used to cover income taxes and FICA (aka social security and medicare taxes).
If you do not pay enough estimated tax payments or they are made late, it could lead to being charged a penalty by the IRS.
There a many things to think about if you are looking to take a leap into starting your own business. It is always wise to seek the advice of a CPA or Attorney to help make the best business decision for you.
If a single member LLC is best for you and you are ready to get your business up and running, Equity Doc Prep is waiting to help. We have the knowledge and experience to set up your single member LLC business entity for you.
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