What is a Single-Member LLC?
A single-member LLC is a limited liability company with only one owner (referred to as a “member”). A single-member LLC still has all the same benefits as an LLC with multiple members, however, it offers the simplicity of the sole proprietorship for filing income taxes.
What Tax Identification Number Can a Single-Member LLC Use?
Generally, LLCs can use an Employer Identification Number (EIN) or the Social Security Number of its sole member. An Employer Identification Number (EIN) is sometimes referred to as a Taxpayer Identification Number (TIN). It is a nine-digit number generated by the IRS to identify business entities for tax purposes. This number is the “account” for paying federal employment taxes.
The IRS allows LLCs to choose whether to be federally taxed as a sole proprietorship, partnership, or corporation.
A sole proprietorship or single-member LLC is considered a “disregarded entity” for income tax purposes. A disregarded entity means the business entity is disregarded (or separate) from the member for federal tax purposes, meaning a separate tax return isn’t needed for the business. An LLC electing to be taxed as a sole proprietorship is not required to use a separate tax ID number unless it has employees or will need to file excise tax returns. Even though it is disregarded for tax purposes, the LLC is still separate from the owner for liability purposes.
LLCs that elect to be taxed as an S Corporation are considered pass-through entities and pass all the income or losses to the members and the LLC has no income or losses.
Absent an election to have your LLC taxed as a corporation, the LLC profits will be taxed through the member’s personal tax return by filing a Schedule C. The income from the LLC is combined and taxed overall along with any other taxable income earned by the member.
When Does a Single-Member LLC Need an EIN?
A single-member LLC can operate using the Social Security Number of the member. This is only possible if a corporate election has not been made and even then, this is not the best practice for several reasons.
Even when a company does not have employees, a single-member LLC should obtain its own EIN. Having an identification number and bank account designated specifically for your business will only strengthen your claims to liability protection under the entity.
If you want your LLC to be taxed as a corporation, the entity would be taxed apart from your individual tax return. In this instance, you will be required to obtain an EIN.
Benefits of an EIN for a Single-Member LLC
Many banks require an EIN to open a business bank account and to secure most business loans. If you open a bank account or take out a loan with your Social Security Number, even if it is used exclusively for your business, you may be found personally liable for this obligation later. In practice, you are still likely to be liable for a business loan regardless of having an EIN, as most banks will require a personal guarantee..
Even if you start out with no employees, having an EIN from the beginning will allow you to quickly grow when you decide to hire. If you operate with your Social Security Number and then want to add employees, you will lose some time trying to obtain an EIN and change the paperwork for your existing business accounts.
How to Get an EIN
To apply for an EIN, you will need to file Form SS-4 with the Internal Revenue Service. If you complete this application online, you can immediately receive your EIN. A confirmation letter will also be sent to you.
While completing this information, you will be asked to furnish information about you and your business, the reason for applying for an EIN, and some information about your general business purpose. Having this information in front of you will make it easier to complete the application. This will ensure accuracy, but it is also necessary because the application will time-out after 15 minutes, and the information will not be saved once this occurs.
Learn how to apply for an EIN in about 5 minutes, at no cost, with our video.
Apply for EIN Online with the IRS: https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online
General instructions for completing the Form SS-4: https://www.irs.gov/pub/irs-pdf/iss4.pdf