Can One Person Form an LLC?

By Larissa Bodniowycz, J.D.

Can One Person Form an LLC?

By Larissa Bodniowycz, J.D.

A sole proprietorship is not the only option for a business owned by a single person. It takes only one person to form an LLC and obtain the benefits that go along with doing business as an LLC.

Man in apron stands in workshop

Benefits of an LLC for Single-Owner Businesses

In a sole proprietorship, the single business owner runs the business in their own name. It is the easiest and cheapest form of business to start. Customers make payments directly to the sole proprietor, who deposits funds in a personal bank account. No formal registrations are required. The owner reports and pays taxes on business income on their personal income taxes.

So, why deviate from this simple formula and start an LLC if you are a single-owner business? There are a number of reasons, but chief among them is personal liability protection. Forming an LLC conceptually separates the business from the owner. The LLC owner's assets are protected from the reach of business creditors. Operating an LLC also makes accounting for the business easier and makes the business seem more established because customers pay the business not the individual owner.

Unless they elect otherwise, single-member LLCs are taxed as pass-through entities, which means they report and pay taxes through the owner's individual return, just as if they were a sole proprietorship.

Structure of Single-Owner LLCs

An LLC must have at least one member and one manager. "Member" just means owner. "Manager" means a person in charge of managing the LLC's business operations. Single-owner LLCs are usually member-managed, meaning the owner serves as both the owner and the manager of the LLC. However, the owner also has the option of appointing outside managers. Outside managers can serve as comanagers with the owner, or the owner can step back and allow the managers to manage the LLC independently.

Separation of Personal and Business Assets

A single-owner LLC must keep the finances, records, and business of the LLC separate from those of the owner him or herself. If an LLC owner treats the LLC as an extension of him or herself rather than a separate business entity, courts can hold the owner responsible for the LLC's liabilities.

Operating Agreements for Single-Owner LLCs

An operating agreement is a legal document that sets out rules and regulations for the operation of the LLC. It is kept with the company's records. Operating agreements address issues including how the LLC will be funded, who will manage the LLC, how profits should be distributed, how the LLC will be taxed, how key decisions are made, and whether the business will cover the costs if a member or manager is sued personally.

Some states require LLCs to have an operating agreement. Even in states that do not have this requirement, it is advisable for single-member LLCs to have an operating agreement. An operating agreement provides needed structure for the business. It helps avoid disputes and makes expansion of the LLC easier.

An operating agreement is also evidence that the LLC and individual owner are separate, which can help prevent the owner from being held responsible for business liabilities.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.