The Single Member Limited Liability Company (SMLLC)
Over the last few years there has been a growing interest in a Single Member Limited Liability Company (SMLLC) as an alternative to the sole proprietorship for the organization and operation of a small business. A SMLLC is an LLC in which a single individual or other entity (called a “member”) owns all of the LLC ownership interest.
The SMLLC is a legal entity separate from its owner. This entity provides the owner a larger degree of protection from liability for the acts, debts, and obligations of the SMLLC. It can also offer the choice of taxation as a corporation or taxation as a “disregarded entity”. If the entity is taxed as disregarded, then all income will flow directly to the owner who reports and pays the tax using their personal income tax return.
How extensive is the liability protection given the owner of a SMLLC?
Unlike a sole proprietorship where the business owner and the business are one and the same, a SMLLC is an entity separate from its owner. Most State law provides that a member, governor, manager, or agent of a limited liability company is not personally liable for the acts, debts, liabilities, or obligations of the limited liability company.
However, this does not mean that the owner will not be held liable for any personal guarantees or pledges to any financial institutions.
The owner can also be personally liable for actions (like signing a contract) where it is not clear that the owner is acting on behalf of the SMLLC. All documents of the SMLLC, to include checks, contracts, purchase orders, bids, and the like should bear the name of the business entity with LLC following the name.
Is the owner of a SMLLC Classified as an “employee” and responsible for payroll taxes?
The owner of a SMLLC is self-employed for purposes of employment taxes. Payments to the owner are not classed as “wages” but as “distributions.” The owner is subject to the self-employment tax equal to the sum of both the employer and employee FICA and Medicare tax.
Does a SMLLC require a federal Tax Identification Number (TIN)?
If the SMLLC has employees it will obtain its own TIN for making employment and FICA payments and filing quarterly and annual employment tax returns.
If the SMLLC has no employees the owner may continue to use the owner’s Social Security number or to obtain a separate TIN. If the SMLLC does not have a TIN and the owner uses the owner’s Social Security number, Treasury Regulations require that the SSN be used for all federal tax purposes.