If you’re a solo entrepreneur (a.k.a. “solopreneur”), you have a lot on your plate. With the buck stopping with you on every last thing, you single-handedly manage the strategy and tactics of all aspects of your business. Indeed, working as a solopreneur deserves some serious kudos!
For the sake of keeping legal obligations as uncomplicated as possible, many solopreneurs start their businesses as sole proprietorships. Because it’s the simplest way to run a one-person business legally, that’s not surprising.
Unfortunately, operating as a sole proprietor has its drawbacks. Namely, you don’t have separation between your business and personal assets. Therefore, if your company faces a lawsuit or experiences financial hardship, your personal bank accounts, property, retirement savings, etc. could be at risk.
But incorporating has its potential downsides, too. Yes, you get liability protection; you also get saddled with some complex compliance formalities that can take away from the already limited amount of time you have to concentrate on growing your business.
Sigh. What’s a responsible solo business owner to do?
Single-Member LLC To The Rescue
Thankfully, most states now offer the option to form your business as a single member Limited Liability Company (LLC). With reasonable filing costs and low-maintenance compliance requirements, this business structure serves as a viable alternative for solo owners who want liability protection without too many corporate formalities.
Flavors of The Single-Member LLC: Member-Managed Vs. Manager-Managed
When you establish your business as a single member LLC, you name a single person (yourself) as the principle member of your organization. By default in most states, you will operate as a “member-managed” LLC if your Articles of Organization (or Operating Agreement, if you have one) don’t specify your preferred management structure. That means you are both the owner and the manager.
The other option is to be “manager-managed.” Most single-member LLCs opt to be member-managed, but manager-managed may make sense if your LLC owns multiple locations (such as retail stores). In that scenario, you might benefit from designating managers at the individual locations, so they have the authority to make certain decisions, write checks, hire/fire employees, manage inventory, etc.
Taxes And The Single-Member LLC
Most single-member LLCs are considered “disregarded entities,” and therefore they’re taxed like sole proprietorships. For the most part, it’s pretty simple stuff. As a single-member LLC/disregarded entity, your business profits and losses flow through to your personal tax return (filed via Schedule C of your Form 1040). You won’t file a separate tax return for your business.
Besides the obvious simplicity and time savings, it also allows you to avoid the double taxation faced by many C Corporations. (Note that you can opt to be taxed as a corporation if it benefits you. I highly recommend talking with a tax advisor to discuss which type of tax treatment makes the most sense.)
The Lowdown On Liability
You can sleep a little better at night with the personal liability protection provided by being an LLC. Typically, you won’t be personally liable for the debts of your business if your LLC is sued or can’t pay its debts.
However, I want to make sure you understand the limitations when it comes to single-member LLC liability protection.
What it covers:
- Guards your personal assets in the event of a contract suit (if your business doesn’t live up to its contract obligations)
- Guards your personal assets in the event a business partner did something wrong
What it doesn’t cover:
- Tort lawsuits related to your own actions (if you’re performing work on behalf of your business and your actions harm someone)
Realize that for the limited liability to be honored, you must demonstrate you and your business are separate entities. Keep your business and personal finances separated at all times. If you don’t a plaintiff will more easily pierce your “corporate veil,” putting your personal assets in jeopardy. Another way to keep that corporate veil intact is to create an Operating Agreement for your LLC. Although not required, it allows you to prove more fully that you operate a structured company that is independent of your personal affairs.
Stepping Up To A Single-Member LLC
Before changing your sole proprietorship to a single-member LLC, I encourage you to talk with an attorney and tax professional first to make sure it’s the best option for you. Then, if all signs point to yes, you can get the ball rolling by filing to form an LLC in your state. An attorney can help you with this, or, to save time and money, consider using a reputable online legal filing service, like CorpNet.
While establishing a single-member LLC is a relatively simple process, you’ll want to make sure all your paperwork is accurate to avoid any delays in getting the liability protection you need to protect your personal assets.
