When starting a new project, it is essential to correctly choose the business structure. One-person LLCs are usually a highly used option by entrepreneurs without partners due to their numerous advantages.
In this guide, we are going to see everything you need to know so you can make a decision about whether the one-person LLC is the best option for you. We will see what it is, what its advantages and disadvantages are, how it works and how it compares to other business structures that you could also use.
What is a Sole Proprietorship LLC?
A single member LLC or "Single Member LLC" is a limited liability company with a single voting member. That member is the owner of the LLC.
In contrast, multi-member LLCs have multiple partners who hold percentages of ownership of the business, and who vote to make important decisions.
Regardless of the number of owners, all LLC offer:
- Liability Protection:Business owners are protected from personal liability for their company's debts or liabilities. Instead, the liability falls on the LLC, meaning the business is considered its own legal entity.
- "Pass Through Taxation": The LLC does not pay taxes as a business, but rather the tax liability passes through to its members' personal tax returns. If you are a non-resident of the USA, your LLC will not pay taxes in the USA.
Advantages and Disadvantages of the Unipersonal LLC
Opening a sole proprietorship LLC will offer several advantages and disadvantages to your business.
| Advantages | Disadvantages | ||
|---|---|---|---|
| Liability protection: an LLC is a legal entity | Costs: an initial filing fee and there may be fees and annual reports to submit with associated costs. | ||
| Possibility of incorporating new partners | Paperwork: You may have to submit annual compliance forms to demonstrate compliance | ||
| Tax flexibility: in the tax return federal taxes, you can declare as a sole proprietorship or corporation | Separation of personal and business assets: Not separating personal and business assets puts your corporate veil at risk and then your assets | ||
| Transfer of property: You can transfer property to other people | |||
| Pass-Through Taxation: No taxes are paid as company, but as a person |
How to open a one-person LLC?
A sole proprietorship LLC is registered following the same stages to open an LLC:
- Choose the state in which you want to register your One-Person LLC: There are 50 states in which you can register an LLC, and each has advantages and disadvantages.
- Selecting a name for your Sole Proprietorship LLC: Your business name must be distinctive within the state and include the words "Limited Liability Corporation" (LLC). The state prohibits the use of several terms.
- Get a Registered Agent: A person who is at least 18 years old and resides in the state in which you incorporate your LLC will act as the registered agent. He or she will be responsible for providing members with official documentation. Many companies offer the services of a registered agent.
- Sign the Articles of Organization: The "Articles of Organization" must be completed and submitted. You can obtain this form on each state's website to create your LLC. Here you will find all the essential data about your company. Each state has a different rate for this.
- Create the LLC operating agreement, which describes how the entity will be managed. It is not required, but it is highly recommended.
- Apply for an EIN: For example, to create a business bank account or hire staff, you will need your EIN. A corporate bank account is essential for keeping your personal assets separate from those of the corporation. In addition, accounting will be considerably simplified.
- Meet your annual obligations: Your obligations will vary by state (annual reports, taxes, IRS filings). Failure to comply with responsibilities may result in fines or closure of the LLC.
How do taxes work for a Single-Person LLC?
By default, a Sole Proprietorship LLC is taxed the same way as a Sole Proprietorship: the IRS does not separate the LLC from its owner. The owner will pay the income taxes of the LLC on his personal tax return. It is the concept of "Pass-Through Taxation" that we mentioned previously.
However, you can also choose to be taxed as:
- A C Corporation: You must file IRS Form 8832 to confirm your tax status, and then report all business income on IRS Form 1120. That income will be taxed at the corporate tax rate. For this reason, single-member LLCs rarely choose to file as C corporations.
- An S Corporation: You will need to file the IRS Form 2553 and then report all business income on IRS Form 1120S. Like the LLC, taxing as an S corporation offers pass through taxation. The difference is that when you are taxed as an S corporation, you do not have to pay Self Employment Tax.
Simply put, you have the final say on how your LLC is taxed and a tax professional can help you determine what is best for you. But we've broken down the basics for you.
Unipersonal LLC vs Sole Proprietorship
When opening a new small business, creating a digital business or starting a secondary activity as a freelancer, it is normal to hesitate between opening a sole proprietorship LLC or a Sole proprietorship. Here we can compare the characteristics of each one.
| Sole proprietorship | Sole Proprietary LLC | |
|---|---|---|
| Procedures | requires minimal paperwork. | requires initial paperwork. |
| Cost | No costs or maintenance. | The cost varies depending on the state. There are usually annual fees, but it also depends on the state. |
| Limited liability | There is no separation between your personal assets and expenses and those of your company. You are personally responsible for all debts and obligations of your company. | Business and personal assets are separate. There is limited liability. |
| Members | They cannot add members in the future. | LLCs may add members in the future. |
| Taxes | Pass Entity. You report your business income on your personal tax return. | Taxed as Sole proprietorship by default, but you can also choose to be taxed as C-Corp or S-Corp. |
Frequently Asked Questions
Is it easy to open a Sole Proprietorship LLC in the United States?
Opening a Sole Proprietorship LLC is a relatively easy process that can be done online, and takes about 2 to 3 weeks. Opening a Sole Proprietorship LLC in the United States is then easy, accessible and fast for anyone in the world.
How much does it cost to open a sole proprietorship LLC?
The cost of a Sole Proprietorship LLC will depend on the state in which you decide to open it. First, you have to pay a one-time registration fee, which ranges from about $50 to a few hundred dollars, depending on the state.
In many states, you must file an annual report and pay an annual fee or tax. This varies by state, but with the exception of California, it ranges from $10 to $300 per year.
In what state should I open my sole proprietorship LLC?
Some of the best states to create a sole proprietorship LLC are Wyoming, Nevada, South Dakota, New Mexico, Delaware, and Florida. These states are considered very business-friendly due to their low or no tax rates.
What types of company do you opt for a one-person LLC?
The companies that most often opt for one-person LLCs are new ventures that seek to go to market quickly and at a low cost, freelancers, digital entrepreneurs, e-merchants... Basically, they tend to be small digital companies.
Can I open a sole proprietorship LLC if I don't live in the USA?
Any person over 18 years of age and with a valid passport can open a one-person LLC. It is entirely possible to open an LLC as a non-resident.
Is it easy to dissolve a sole proprietorship LLC?
To close a one-person LLC, federal, state, and local requirements must be met.
You must formally dissolve the business in your state by filing specific legal documents, which are different in each state. You must also notify your state's tax authority for income tax and sales tax purposes.
You must also notify the IRS.
How do I pay my salary with a sole proprietorship LLC?
The owner of a sole proprietorship LLC does not receive a salary or salary from his business. The owner can take money out of the business at any time. This is called owner withdrawal.
Written by
Ignacio Navarro
Ignacio Navarro is a Certified Public Accountant, graduated in 2020 from the National University of Tucumán. Founder of Start Companies since 2023, he advises clients worldwide on forming LLCs in the United States and on proper tax filing. His expertise combines legal, tax, and practical knowledge, offering a comprehensive service that spans from company formation to bank account setup and sales platform integration.
