If you run a business with no employees other than yourself, then you’re in good company. There are roughly 30.4 million non-employer businesses, also known as solopreneurs, in the US, according to the Small Business & Entrepreneurship Council.
As a team of one, a lot of key decisions fall to you. One of the most important decisions is selecting the right business structure and establishing a payroll system for yourself as both owner and employee.
There are several business structures to consider, including sole proprietorship, limited liability company (LLC), S corporation, and C corporation. This article focuses on the two most common starting points: sole proprietorships and single-member LLCs (SMLLCs).
This might not be the most exciting decision you’ll make as a business owner, but the structure you choose affects everything from your tax obligations to required paperwork and protection for your personal assets.
Single-member LLC taxes: Key takeaways
- Single-member LLCs provide personal liability protection while offering flexible tax options.
- By default, a single-member LLC is taxed like a sole proprietorship, but you can elect S Corp or C Corp treatment to potentially optimize your tax situation.
- The right structure depends on your income level, risk exposure, and long-term goals.
- Carefully weigh the pros and cons of LLC formation, including setup costs and ongoing maintenance requirements.
A sole proprietorship is the simplest way to start a business. In fact, if you start a business without a partner and don’t register as any other type of business entity, the Internal Revenue Service (IRS) automatically considers you to be a sole proprietorship.
But simple isn’t always optimal, especially when it comes to taxes and personal liability protection. That’s where a single-member LLC offers some benefits worth considering.
It’s always a good idea to discuss the decision with your attorney and accountant, but this article offers a high-level look at the advantages and disadvantages of turning your sole proprietorship into an LLC.
What is a single-member LLC?
A single-member LLC is a limited liability company with one owner, referred to as a member. Like a sole proprietorship, it’s designed for individual business owners, but there are some notable differences.
One big advantage of operating as a single-member LLC is personal liability protection. Once you form an LLC, the company becomes its own legal entity. This means your personal assets, like savings, investments, and your home, generally aren’t at risk if your business faces a lawsuit or bankruptcy.
How to form a single-member LLC
Forming a single-member LLC takes a bit more legwork than starting a sole proprietorship. Requirements vary by state, but the process typically involves filing Articles of Organization with your state and paying a filing fee.
Those fees range from $45 to $520, depending on the state, with most states falling in the $50 to $200 range.
“Generally speaking, you form a single-member LLC by registering with the state in which you reside and do business. Most states require filing paperwork to form an LLC, which includes articles of organization.”
— Peggy James, CPA and OnPay expert contributor
Once registered, plan for ongoing costs as well. Many states require annual reports, charge renewal fees, or require an annual franchise tax. It’s a good idea to research your state’s specific requirements before you get started.
Do I need an operating agreement for a single-member LLC?
Most states do not require an operating agreement when forming a single member LLC, so it’s up to the discretion of the person registering the LLC whether to have one. It can be less important for a SMLLC than a multi-member LLC; for the latter, an operating agreement can help to define roles and responsibilities, which could be particularly important if disputes arise down the road.
— Peggy James, CPA and small business consultant
What’s the difference between a single-member LLC and a sole proprietorship?
One reason sole proprietorships are so common is that you don’t have to take any formal action to become one. There’s no paperwork, filing fees, or registration. If you freelance or run a one-person service business, there’s a good chance you already operate as a sole proprietor by default.
The tradeoff is liability. As a sole proprietor, there’s no legal separation between you and your business. That means you can be held personally responsible for any debts, losses, or legal judgments against the business. You keep all the profits, but you also absorb all the risks. That dynamic is especially important as your business grows and you hire employees, since compliance obligations increase with headcount.
A single-member LLC draws a clear line between your personal finances and your business. That separation is the core reason many solo business owners form an LLC.
The table below offers a quick comparison of the two structures.
Differences between a single-member LLC & sole proprietorship
| Sole Proprietorship | Single-Member LLC |
| No action or paperwork needed to establish | Requires filing Articles of Organization and may also involve filing ongoing annual reports or other compliance-related paperwork |
| No legal separation between you and your business — you are liable for debts and losses | You are protected from personal liability if the company faces bankruptcy or litigation |
| No fees involved in setup | Initial set-up fees range from $50 to $800. There may also be annual fees of as much as $800. |
But these aren’t the only differences between the two structures. There are also tax differences to keep in mind.
LLC benefits: Tax advantages of single-member LLC
Beyond limiting personal liability, the flexibility in taxation is likely the second biggest benefit of forming an LLC.
By default, a single-member LLC is taxed the same way as a sole proprietorship. The IRS treats it as a “disregarded entity,” meaning it doesn’t recognize your LLC as a separate tax-filing entity. As a pass-through entity, your business income and expenses flow directly to your personal tax return via Schedule C, and you pay self-employment tax on the full net profit.
What sets an LLC apart is the option to change that default, either when filing business taxes for the LLC for the first time or years later. You can elect to have your LLC taxed as a C Corporation or S Corporation.
- C Corp taxation means the IRS taxes your business profits at the flat federal corporate tax rate of 21% rather than passing taxable income through to your personal return. If your personal tax rate is higher than 21%, that change can produce real tax savings. The tradeoff is double taxation. A C Corporation pays taxes on its profits, and then shareholders pay taxes again on any dividends they receive from the company.
- S Corp taxation avoids that double-taxation problem. With this LLC loophole, all income still passes through to your personal return, but only the salary you pay yourself is subject to self-employment taxes. Any remaining profit distributed to you as an owner isn’t. For LLC owners with consistently high profits, this can result in significant self-employment tax earnings. We’ll cover that benefit in greater detail in the next section.
How does an LLC help with taxes?
Forming an LLC by itself doesn’t change how you’re taxed. The IRS treats a single-member LLC as a disregarded entity by default, the same as a sole proprietorship. The tax advantages come from electing to be taxed differently.
— Peggy James, CPA
Choosing S Corporation taxation is a popular option for single-member LLC owners. As SCORE notes, “LLC owners find the S corp option more attractive than the C corp because, with C corp tax treatment, profits are taxed at the corporate level, and then the distributions made to the owner are taxed on the individual level, as well.”
With S Corp taxation, that double hit doesn’t apply. Income passes through to your personal return, and you only pay self-employment taxes on the salary you pay yourself. Remaining profits distributed to you as an owner aren’t subject to self-employment tax. That’s where the potential savings come from.
One thing to keep in mind is “reasonable compensation” isn’t optional. The IRS requires S Corp owner-employees to pay themselves a reasonable salary for the work they perform. So, for example, you can’t pay yourself $1 to minimize FICA taxes and take the rest as distributions. Your accountant can help you figure out what a reasonable salary is based on your business and the type of work you perform.
For a quick comparison of how the major business structures handle ownership, liability, and taxes, here’s an overview:
| Business structure | Ownership | Liability | Taxes |
| Sole proprietorship | One person | Unlimited personal liability | - Pass-through
- Reported on Schedule C
|
| Partnership | Two or more people | Unlimited personal liability unless structured as a limited partnership | - Pass-through
- Reported on Form 1065
- Self-employment tax (limited partners generally exempt)
|
| C Corporation | One or more people | Owners not personally liable | - Taxed at flat 21% federal corporate rate
- Reported on Form 1120
- Dividends taxed again in personal return
|
| S Corporation | Up to 100 shareholders; must be US citizens or resident aliens | Owners not personally liable | - Pass-through
- Reported on Form 1120-S
- Owners pay self-employment tax on salary only
|
| LLC (Single Member) | One or more people | Owners not personally liable | - Pass-through
- Reported on Schedule C
|
| Nonprofit | One or more people | Officers and board members not personally liable | |
| LLC (Multi-member) | Two or more owners | Owners not personally liable | - Pass-through
- Reported on Form 1065
|
Ease of use
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Benefit from single-member LLC tax deductions
One often-overlooked advantage of running your own business (no matter which entity structure you choose) is deducting business expenses.
For example, if you work from home, you may qualify for the home office deduction. This lets you deduct a portion of your home mortgage, property taxes, utilities, and other expenses.
Other common deductions include business-related subscriptions and publications, licensing fees, and advertising expenses. These deductions aren’t unique to any one business structure. They’re available to most entity types.
Where your tax structure makes a difference is how the IRS treats income and losses at the entity level. Here’s a quick comparison of S corp and C corp treatment on the points that matter most to small business owners.
| S Corp | C Corp |
| Taxation | Pass-through; income reported on your personal return | Taxed at the entity level at the flat 21% federal rate |
| Double taxation | Not applicable | Profits taxed at corporate level; distributions taxed again on your personal return |
| Losses | May be deductible on your personal income tax return if you meet IRS basis and at-risk rules | Can’t be passed through to your personal return |
| Self-employment tax | FICA applies to your salary only; distributions aren’t subject to SE tax | FICA applies to your salary only; no SE tax on dividends |
| Best fit for | Owners who want pass-through treatment with SE tax savings | Owners who plan to reinvest profits rather than distribute them, and whose personal tax rate exceeds 21% |
The right choice depends on your income level, how you plan to use your profits, and how your business structure affects the Section 199a QBI deduction. Your accountant can help you model out which structure produces the better tax outcome for your specific situation.
How do I pay myself as the owner of a single-member LLC?
How you pay yourself depends on how the IRS taxes your LLC.
Default LLC treatment (disregarded entity)
If you haven’t elected to be taxed like an S Corp or C Corp, you pay yourself through an owner’s draw. You withdraw money from your business account as needed rather than receiving a formal paycheck.
Pro tip:
While the specific amount and timing of an owner’s draw is up to you, there are some best practice steps to follow so that you have a paper trail.
- Draft a check on your business account that is made payable to yourself and deposit the check into your personal bank account
- You can also make a direct deposit from your business account to your personal account
- Keep a record in your business accounts of this withdrawal. Your paper trail can either be in the form of a check or records of an online transfer.
Can an owner of an LLC be on payroll?
The owner of an LLC that has not made an election to be taxed as a corporation should not be on the payroll or otherwise treated as an employee. For tax purposes, the owner of a single-member LLC is considered a sole proprietor, and net business income is subject to self-employment taxes.
— Peggy James, CPA
An owner’s draw is simply money taken from your business’s equity or profits for personal use. You can technically withdraw 100% of your equity, but doing so leaves your business undercapitalized and creates operational and tax problems. Most owners factor in cash flow, seasonal fluctuations, and upcoming expenses before deciding on the amount and timing of owner draws.
Here are some best practices for taking an owner’s draw:
- Write a check from your business account made payable to yourself, then deposit it into your personal account
- Alternatively, make a direct deposit from your business account to your personal account
- Record every withdrawal in your business books, whether by check number or transfer confirmation
S Corp treatment
If you’ve elected to have your LLC treated as an S corp for tax purposes, how you pay yourself changes entirely. You’re treated as an employee of your own business, so you have to pay yourself through payroll, withhold income and payroll taxes from each paycheck, and file quarterly employment tax returns.
The IRS also requires you to pay yourself a reasonable compensation for the work you perform. You can’t set an artificially low salary to minimize FICA taxes. The IRS looks closely at S corp owner compensation, and getting it wrong can trigger penalties.
Paying taxes on an owner’s draw as a single-member LLC
When you pay yourself through an owner’s draw, you don’t withhold taxes from that money. But that doesn’t mean the income is tax-free. It means you’re responsible for setting aside money for taxes.
For most single-member LLC owners, that means making quarterly estimated tax payments to the IRS rather than paying one lump sum with your tax return. If your total tax liability for the year is more than $1,000, the IRS expects you to pay as you go. Missing those quarterly deadlines can result in underpayment penalties even if you pay in full by April.
Use Form 1040-ES to calculate your estimated tax payments and submit payments by April 15, June 15, September 15, and January 15 of the following year. Missing these deadlines can trigger an underpayment penalty, even if you pay the full amount due by April 15.
As a single-member LLC, you don’t file a separate business tax return. Instead, you report your business profits and losses on a Schedule C, and file it as part of your personal income tax return. It’s due on April 15 along with the rest of your federal income tax return.
One thing that catches many single-member LLC owners off guard is you owe taxes on all of your business’s net profits, not the amount you drew. If your business earned $80,000, but you only withdrew $50,000, the full $80,000 is still taxable income.
Paying taxes as a corporation
When your LLC is taxed as an S corp or C corp, your tax obligations change in a few important ways. You’re no longer just tracking profit and loss for Schedule C. You need to run payroll, withhold income and FICA taxes from your own paychecks, file quarterly income tax returns, and in the case of an S corp, document that your salary meets the IRS’s reasonable compensation standard.
That’s more moving parts than the default LLC treatment, and the compliance stakes are higher. A payroll service provider can help you stay current on filing deadlines, tax rate changes, and employer obligations so you can spend less time on compliance and more time running your business.
Related reading
Once you decide on a tax classification, you make it official with the IRS by filing Form 8832 (or Form 2553 to elect S Corp status). Our guide walks you through the instructions step by step.
Advantages and disadvantages of a single-member LLC
Forming a single-member LLC makes sense for many solo business owners, but the right choice depends on your specific situation. Here’s a look at the pros and cons to help you decide what’s best for you:
Pros
- Personal liability protection. Your LLC is a separate legal entity from you as a person. Your personal assets, such as your savings, investments, and home, are generally shielded from business lawsuits and bankruptcy. This is important if you operate in a high-risk industry or have significant personal assets worth protecting.
- Tax flexibility. By default, the IRS treats your single-member LLC the same as a sole proprietorship, and income passes through to your personal tax return. But you also have the option to elect S corp or C corp taxation. Depending on your income, this could potentially result in tax savings.
- Credibility. An LLC signals to clients and lenders that your business is a formal, registered entity.
Cons
- Set-up cost. Unlike a sole proprietorship, forming an LLC typically requires filing Articles of Organization and paying state filing fees.
- Ongoing maintenance fees. LLC registration isn’t a one-time event. States may require annual reports, periodic filings, and renewal fees. Some states also charge an annual franchise tax. For example, California charges an $800 minimum annual franchise tax, even if the LLC doesn’t earn any income that year.
- More administrative complexity. Maintaining your liability protection requires keeping your business finances genuinely separate from your personal finances. Depositing business income into your personal account, paying personal expenses from a business account, neglecting to sign contracts in the LLC’s name, and not keeping basic business records can expose you to personal liability, even if you have an LLC.
One last thing before you decide
Choosing the right structure from the start matters more than you might think. While it’s possible to change your business entity type later, the process isn’t always simple. And depending on your situation, it can have tax consequences.
To change your LLC’s tax classification with the IRS, use Form 2553 for S corp treatment or Form 8832 for C corp treatment. Once you make the classification change, the IRS generally won’t allow another change for 60 months without its approval.
State-level requirements also vary, so it’s a good idea to work with an experienced tax advisor who can explain the federal and state implications.
Your entity structure also plays a role in business growth, from hiring employees to seeking outside investors or exploring financing options. Our guide to SBA loans is a useful next read if you’re headed in that direction.
Please note all material in this article is for educational purposes only and does not constitute tax or legal advice. You should always contact a qualified tax, legal or financial professional, in your area for comprehensive tax or legal advice.
