Single Member LLCs in Alabama

(This blog was originally published on sarahsshepard.com )

As far as legal business formations go, limited liability companies are among the most popular small and medium-sized business owner’s options. This has mostly to do with the entity’s ease of use, personal asset protection, and tax implications based on a pass-through tax system. LLC owners are taxed based on their individual income rather than paying a corporate tax rate.

However, one thing that most budding entrepreneurs don’t know is that there are several variations of the traditional LLC. One of those variations is the single-member LLC. For example, suppose you’re the sole owner of your company or looking into buying a business in Alabama alone. In that case, your Alabama business lawyer will likely recommend this formation for you.?

Single-member LLCs are lesser-known business entities, so this article will discuss them. So, keep reading to learn more about Single-member LLCs in Alabama to see if the business structure is right for you.

What Is a Single-Member LLC?

When you see the term “single-member” in front of “limited liability company,” it denotes explicitly that the LLC has one single owner. LLCs typically refer to their owners as members. A single-member LLC has all the same advantages as a traditional LLC, just without the additional members.?

Therefore, a SINGLE MEMBER LLC works just like an LLC. The business owner’s personal assets are protected from debts and other liens.

The Internal Revenue Service (IRS) also treats the LLC business structure like a sole proprietorship or partnership, depending on the number of members involved. With single-member LLCs, the IRS sees the sole member of the business as a sole proprietor for tax purposes.

Single Member LLCs can become confusing regarding taxation because the IRS also considers this type of business formation a “disregarded entity.” In other words, the actual business is ignored for tax purposes as it is not seen as a separate entity for federal tax purposes like how a corporation or other business purpose entities are.

Generally speaking, all LLCs pay a pass-through tax , which means that the LLC itself does not pay taxes and doesn’t have to file a tax return with the IRS on behalf of the business since it’s a disregarded entity. Therefore, all the business profits and losses are reported via each member’s personal income tax returns, which is the same in the case of the single-member LLC.?

As the sole owner of your SINGLE MEMBER LLC, you must report these profits and losses on a Schedule C tax form and submit it along with your 1040 tax return. It should be noted that even if you leave profits in your business’s bank account at the end of the year — for example, to cover future business expenses or to expand operations — you’ll still have to pay income tax on those profits.?

Lastly, just like LLCs, Single Member LLCs also can pay income taxes as a corporation or an S corporation . To switch over to a corporation tax status, the SINGLE MEMBER LLC would have to file an election with the IRS using Form 8832 . For S corporation status, Form 2553 would have to be used.?

What Are the Advantages and Disadvantages of a Single Member LLC?

As mentioned earlier, Single Member LLCs have all the same advantages as LLCs. They also have their own disadvantages, as all business formations do.

Let’s talk about the advantages that come with Single Member LLCs first:

• Single Member LLCs are separate entities from their owners. This means that your legally registered business is not attached to your identity, limiting your overall liability to your investment in your company. In other words, if someone files a lawsuit against your business or creditors come around trying to collect on business debts, they can’t go after your personal assets such as your car, home, bank account, etc.?
• Single Member LLCs are recognized as legitimate businesses. This time of recognition adds value to your business and brand identity, as it proves your credibility.?
• Single Member LLCs become registered businesses of the state. In Alabama and every other state, a legally registered SINGLE MEMBER LLC carries weight regarding preserving your business’s name. That means no other company in the state of registration can lawfully use your business name.? ?
• Single Member LLCs are automatically taxed as sole proprietors. Unless you elect to be taxed otherwise, you’ll be taxed based on personal income rather than corporate tax rates.
• Single Member LLCs are separate from the owners in the eyes of the law; therefore, when you enter into business agreements or contracts, acquire debts, or incur other business obligations, only your Single Member LLC will be held accountable — not you as an individual.

Now let’s talk about the disadvantages that come with Single Member LLCs:

• The costs. Like LLCs, Single Member LLCs are subject to state formation fees and other ongoing fees to keep it current such as annual report fees and potential franchise taxes.
• Raising capital may be difficult. LLCs, in general, cannot issue stocks or bonds as a corporation does. This means that LLCs must rely on the internal contributions of their members, and with a Single Member LLC, there’s only one member. This could mean taking out a personal loan or business loan to secure financing for your business — and you may have to use your business’s assets as collateral if you don’t have good credit.??
• You’ll have to be on top of your taxes. When you form an LLC, you’ll be 100% responsible for reporting and paying income taxes, social security, and Medicare contributions. Additionally, suppose you slip up and forget to pay a specific tax, like a franchise tax. In that case, your entity could be dissolved automatically.?

Single Member LLCs may come with more paperwork than sole proprietorships, but the advantages outweigh the disadvantages. This is especially true when you consider the disadvantages of other business entities.?

Of course, weighing the pros and cons of a Single Member LLC isn’t necessarily the primary way to determine whether this business formation is right for you or not. It all comes down to the type of business you plan to run and which type of entity will suit your business needs best. It also comes down to the number of members involved and their responsibilities.

Suppose you’re unsure whether a Single Member LLC, another variation of an LLC, or another type of business entity altogether is right for you. In that case, your Alabama business lawyer will be able to advise you best.

What Are the Requirements to Form a Single-Member LLC in Alabama?

Forming a single-member LLC in Alabama is essentially the same as creating a traditional LLC. Here’s what you would need to do to get started:

• Choose a name. This name should be separate from your business name and your actual name. It must also be easily distinguishable from other business entities and contain “LLC” or LIMITED LIABILITY COMPANY” in the name, whether it’s spelled out or abbreviated. Once you decide on a unique name, you’ll need to reserve it with the Alabama Secretary of State (you can do this online for a $28 fee).
• Appoint a registered agent. Next, you’ll need to appoint an “agent for service of process.” This person will be responsible for accepting service of processes on your business’s behalf. Your registered agent can be your Alabama business lawyer, an individual residing in the state, another Alabama business entity, or an out-of-state entity with headquarters in Alabama. ???
• File a Certificate of Formation. In Alabama, your Certificate of Formation must be filed with your county’s probate court — not the Secretary of State. Your Certificate of Formation must include pertinent information regarding your businesses, including your Single Member LLC’s name and address of your registered agent, the effective date your Single Member LLC will begin, and the signature of your Alabama business lawyer or organizer.
• Prepare your operating agreement. While Alabama does not legally mandate operating agreements, it’s still strongly advised that you document your standard operating procedures to prove the limited liability of your business and the fact that it’s a separate entity.?
• File your state tax return and annual report. Your tax returns and annual reports must be filed with the IRS every year. Keep in mind that depending on your business. Whether you have employees, your tax returns and yearly reporting may vary, which you should discuss with a certified public accountant (CPA).
• Be sure to comply with any tax and regulatory requirements. Additional tax and regulatory requirements may apply to your SINGLE MEMBER LLC involving record-keeping and business licensing. Your Alabama business lawyer will help you understand which additional requirements apply to your business.???

How Can a Single Member LLC Be Used in Estate Planning?

The Single Member LLC business entity isn’t just advantageous for business purposes. It’s also a powerful tool that can be used for your estate planning.

For example, you’ll likely want to pass down certain assets to your children, grandchildren, or other family members. You’ll also have to prepare for the gift taxes or estate taxes your beneficiaries must pay once you’ve passed on. An LLC can help you with that.

Whether you form an LLC or a Single Member LLC for your business, the entity itself will provide you with greater control and protection for your assets throughout your lifetime. Essentially, when you pass down assets through your Single Member LLC, you’ll be able to reduce the taxes owed to your estate and by your family members.

This is primarily because when you pass down your business shares, a transfer of ownership is typically done while you’re still alive. Of course, in a Single Member LLC where you’re the sole member, ownership would be gifted through a will or trust. There would still be a gift tax, but there would be significant tax benefits in this case that would enable you to lower your overall estate tax, as doing so takes away “value” from your estate.?

In other words, if your Single Member LLC is put into a living revocable trust , once you pass, your listed beneficiary becomes the owner, and it’s no longer a part of your estate.

Most assets can be transferred into your Single Member LLC, including cash, property, and even personal possessions. Additionally, your business can avoid automatic dissolution when you transfer your Single Member LLC to a beneficiary upon death.?

Suppose you’re planning to start a business independently and don’t plan to involve any other partners. In that case, a single-member LLC may be the business entity suitable for you.?

If you’re unsure about the business entity you should form, get in touch with us to set up a consultation with Sarah S. Shepard or another experienced Huntsville corporate attorney. We’ll make sure you choose the correct formation for your business needs and remain compliant with state and local tax laws.