How to Operate Your Single-Member LLC

You've already taken a large step forward for your business: You've formed your single-member limited liability company (SMLLC). But now you need to take steps to properly manage and operate your SMLLC. Running a small business is no easy task. Setting up procedures to follow from the start can help you take advantage of the benefits of having an SMLLC and help you avoid any missteps that might cost you personally.

Create a Sustainable Management Structure

Once you've formed your SMLLC, one of your first tasks should be setting up its management structure. You'll want to choose a structure that'll best suit you now and in the future. Circumstances can change so you'll want to be sure you set out procedures that you (or a successor) can follow as your business grows.

Before you decide on rules and protocols for how your SMLLC will be managed, you'll need to decide whether you want your company to be:

• member-managed, or
• manager-managed.

In a member-managed SMLLC, you—as the sole member (or owner) of your SMLLC—will also be its manager. As a manager, you'll make all of the decisions for how the business is operated. SMLLCs are considered member-managed by default unless you specify otherwise, either in your articles of organization or operating agreement.

In a manager-managed SMLLC, you have the choice of whether you want to be your business's manager or if you want to appoint someone else as the manager. While this option might make more sense for a multi-member limited liability company (LLC), it can make sense for SMLLCs too. Choosing a manager-management structure can provide you with more flexibility, especially if you foresee yourself passing on the management duties to someone else later on. (For more information, read our article on member-managed vs. manager-managed LLCs.)

Once you decide on a management structure, you should list out the manager's responsibilities—even if you're going to be the manager. A detailed list can provide a roadmap for what decisions you're legally allowed to make and how you should properly make them. Clear rules can also help you limit your liability risks if your business decisions are questioned by employees, lenders, or business associates.

Keep and Safeguard Company Records

Running an SMLLC means keeping copies of a lot of different documents. You'll need to keep copies of:

• your formation documents (including your articles of organization and operating agreement)
• income and expense records (such as your general ledger, profit and loss statements, and projected earnings reports)
• tax returns
• professional and business licenses issued by local, state, and federal governments, and
• business records and contracts.

Besides keeping organized for general business purposes, there are at least three other key reasons you want to keep and have well-organized records for your SMLLC.

Good records for your SMLLC can help with:

• filing your taxes
• dealing with lenders and other businesses; and
• establishing that your business is separate from you personally (discussed below).

For more information, read about record keeping rules for LLCs.

Pay Taxes and File Annual Reports

You'll need to report and pay taxes to comply with federal, state, and local tax requirements. Which taxes you pay will depend on your business's activities.

Income taxes. Regardless of your business activities, you'll need to pay federal (and usually state) income taxes. SMLLCs are taxed as sole proprietorships by default, meaning you'll report and pay taxes on your business's earnings on your individual tax return. If you elect to be taxed as a corporation, then both you and your business will need to pay taxes.

Self-employment taxes. When you own an SMLLC, you're considered self-employed. So, you'll need to pay self-employment taxes, which include taxes for Social Security and Medicare. If you elect to be taxed as a corporation or S corporation, you don't have to pay self-employment taxes.

Sales taxes. If you collect sales tax, you'll need to report and pay these taxes to your state (and sometimes city) governments periodically. Check with your local government to find out the tax rate, which goods and services are taxable, and to who and when to pay these taxes.

Employer taxes. If you have employees, your state might require you to withhold taxes for your employees and to pay unemployment insurance. You'll also need to withhold federal income tax and pay federal unemployment insurance for these employees as well.

Franchise taxes. Your state might require you to pay a minimum tax for the privilege of doing business in your state regardless of how much income your business makes. This tax is usually called a "franchise tax."

You might be required to pay other taxes. For more information, read how LLC members are taxed.

Additionally, your state will probably require you to file an annual report. These annual reports serve to provide your state with up-to-date records about your business. These requirements are the same for multi-member and single-member LLCs. Some states might not require you to file an annual report or instead require a biennial report. Filing fees for these reports also vary.

To find out information specific to your state, see our state guide to LLC tax and filing requirements.

Hold Meetings and Make Resolutions

In the world of multi-member LLCs, member meetings give all members—including those who might not be routinely involved in running the company—an opportunity to participate in major decision-making. In the world of SMLLCs, however, this reason for holding a member meeting loses much of its relevance.

Because an SMLLC has just a single member, who in turn usually is running the company, there often is no issue of notifying other people about big decisions. Similarly, consent actions and resolutions can seem to make more sense for multi-member LLCs than for SMLLCs.

For multi-member LLCs, a primary purpose of resolutions is to give all members a document to refer to in case they later find themselves in disagreement. For an SMLLC, however, there's just one member, so a disagreement, at least among members, isn't possible.

There are, however, other reasons why it might be useful for your SMLLC to hold meetings or at least use written resolutions:

• These formalities can help protect the limited liability status of your company if it comes under question in court.
• An outside party—such as a lender, insurance company, or government agency—might ask that you produce a written resolution as proof that you have the authority to take certain significant actions for your company.
• If you meet with outside advisers—like attorneys, accountants, financial consultants, and other experts—when making business decisions, it can be useful to keep meeting minutes so everyone has a record of what was discussed.
• If you hope to attract outside investment in your business, keeping written records of major decisions can help show potential investors that you're taking your business seriously.

Most business decisions, including day-to-day decisions, are made without resolutions or other documentation. With an SMLLC, you'd only use a resolution to document the most important business matters or actions such as:

• buying or selling real estate
• getting a business loan, establishing a bank account, or otherwise working with a financial institution
• amending the articles of organization or operating agreement
• approving a major contract with a client or supplier
• delegating specific authority to another person or authorizing a person to take a specific action, and
• adding one or more members to the company.

The content of a resolution is flexible and, of course, will vary depending on what action is being taken. For example, a resolution to sell real estate would typically include the property address, the price, the terms of the sale, and a statement that someone (such as the single member of the SMLLC) is authorized to sign all documents necessary to complete the transaction.

Safeguard Your Liability Protections

The greatest advantage of forming an SMLLC is the liability protection you'll receive. While these protections are automatic, they're not absolute. These protections have limits and you can lose the ones you have in some circumstances.

You don't have protection from liabilities when you:

• personally guarantee or co-sign a business loan
• are negligent (or careless)
• committed malpractice as a professional (such as medical malpractice)
• committed fraud, or
• are indistinguishable from your SMLLC.

The first four circumstances might seem easy to avoid. Don't personally guarantee or co-sign a business loan; don't be careless; and don't commit malpractice or fraud. The last circumstance—becoming indistinguishable from your SMLLC—is less simple. Yet, losing distinguishability is one of the more common threats that face SMLLCs because they don't usually have the formalities in place to show that their business is separate from themselves.

Courts can usually find you personally responsible for your business's liabilities (and your LLC veil pierced) if both:

• there's a "unity of interest" between you (the owner) and your SMLLC—in other words, your SMLLC is shown to not really be a separate entity from its sole member (you); and
• you've committed fraud or created an injustice—that is, you, as the owner of your SMLLC, were intentionally using your company to lie to or harm someone.

When Is There a Unity of Interest Between You and Your Single-Member LLC?

A unity of interest means a lack of separation or distinction between your SMLLC and you personally. Courts generally look at multiple factors when determining whether a unity of interest exists. The issues are basically the same for SMLLCs and multi-member LLCs. In general, no single factor is decisive, and how a court weighs each factor will vary from one case to the next.

The most common relevant factors are:

• Undercapitalization of the business. If you don't supply your SMLLC with an adequate (or any) initial investment or you don't maintain adequate (or any) assets on a continuing basis, your business could appear to be a mere empty form without any financial substance. In that case, a court could find your business is a shell that's only meant to shield you from your own wrongdoings and that you aren't entitled to limited liability protection.
• Commingling of business and personal funds. If you routinely use your SMLLC bank account to pay personal expenses, deposit business payments into your personal account, or use personal funds to pay for business expenses, you'll blur the distinction between your SMLLC and yourself. If there's a lawsuit against your SMLLC, this blurring could make it more likely that a court would determine that your SMLLC isn't a separate entity from you.
• Failure to clearly assume obligations in the name of the LLC. If, for example, you sign a promissory note for a loan to your SMLLC but don't include any mention of the SMLLC with your signature, you might leave yourself open to personal liability if your business is unable to repay the loan. Similarly, if you sign business contracts under your name instead of your SMLLC's name, then a court might say that you're indistinguishable from your business.
• Failure to communicate with others in the name of the LLC. Similar to the previous item, if your communications (including emails, messages, letters, and phone calls) and advertisements include your name without your business's name, you could risk becoming indistinguishable from your company.
• Failure to follow LLC formalities. While not usually required for SMLLCs, not following official procedures—such as having an operating agreement, holding meetings, drafting resolutions, and taking votes—could, nevertheless, put you at risk.
• Small size of the LLC. Since you have an SMLLC with only one owner making all the decisions, signing the contracts, and managing the finances, there are more opportunities for you to become interchangeable with your company.

How Do You Distinguish Yourself From Your Single-Member LLC?

By default, courts assume that all LLCs, including SMLLCs, are separate entities from their owners. However, as discussed earlier, there are common pitfalls that can override this assumption. But you can take proactive steps to reinforce the assumption that you and your SMLLC are separate entities, including:

• Make an adequate initial investment into your business. Your initial capitalization might not need to be very large—an appropriate amount will depend on your specific business. For example, a manufacturing business with a lot of machinery, inventory, factory space, and employees likely would have larger initial expenses and therefore need a larger initial investment than a one-person bookkeeping service.
• Open a bank account for your business. Your SMLLC should have its own bank account. Payments your business receives for its goods and services should be deposited into that account, and money in the account should be used only for business purposes. Money in your business account shouldn't be used to pay for any personal expenses. (Paying yourself a salary is a legitimate business purpose.
• Maintain funds in your business bank account. You should make sure that, on an ongoing basis, you keep enough money in your SMLLC's bank account to cover reasonable upcoming expenses. But you don't have to keep enough money in your business account to cover very unusual or unexpected expenses. For example, you don't need to keep an extra million dollars in your account just in case the business gets hit with a huge personal injury lawsuit.
• Sign contracts as a representative of your business. In practical terms, when you sign a contract for your SMLLC—for example, in relation to getting a loan—you should make sure that not only is your own name printed below any signature, but also a comma and a phrase like "Member" or "Manager." Equally important, you should make sure you've printed the name of your SMLLC (for example, "Apogee Services, LLC") above your signature or after your name and title.
• All communications for your business should state your SMLLC's name. For your emails, use the name of your SMLLC in your signature block. For voicemail greetings, it's a good idea to mention "LLC." For bills and letters you send out, use the name of your SMLLC on your letterhead. For directory listings and advertising, show the name of your business, including "LLC."
• Hold meetings and draft resolutions. If you have important meetings between you and your employees or between you and your lawyer or accountant, you should make minutes of those meetings. If you've made an important decision, such as opening a bank account, purchasing a building, or hiring an employee, you should create a resolution that reflects this action.

By taking these actions and avoiding common missteps, you can safely maintain your liability protections. Preserving these protections is an essential part of successfully running your SMLLC. For more tips, read about the strategies to strengthen your LLC asset protection.

Speaking With a Small Business Attorney

Running a small business on your own can be overwhelming. After undertaking the task of forming your SMLLC, you still have a long road ahead of you to make your business work—legally and operationally. If you have experience running a business, then you can probably navigate the process on your own. But if you have questions about the legal side of operating your business, then you should talk to a small business lawyer. They can advise you on the two different management structures, how to preserve your liability protections, and which taxes you're responsible for.