Texas Single-Member LLC Overview
The Texas single-member LLC (SMLLC) is the most popular entity choice for businesses with one owner. In this article, we will address frequently asked questions including advantages, disadvantages, costs, taxation, annual maintenance, etc.
What is a single-member LLC?
What is an LLC?
Should I form a Texas single-member LLC?
What are the benefits of a single-member LLC?
The benefits of a single-member LLC are as follows:
- The owner is shielded from the liabilities of the business. The primary benefit of conducting business through an entity like an LLC is to protect the owner’s personal assets from the liabilities of the business. If you are operating as a sole proprietor, you are personally responsible for the liabilities of the business. Whereas if you operate through an LLC, the liability for the business stays with the LLC and the most the owner can lose is his investment in the LLC.
- The LLC's assets are shielded from the owner’s creditors. An LLC can also protect the business assets from the personal liabilities of the owner.
- Continuity of Ownership. Conducting business through an LLC provides more flexibility and continuity of management and ownership. If a member dies, the LLC can continue on seamlessly. If a sole proprietor dies, the business will come to a standstill until someone is appointed with authority to run the business on behalf of the deceased owner.
- Added Credibility & Professionalism. Conducting business through an LLC gives a more professional impression. Clients will feel like they are dealing with a more organized, established, and trusted company.
- Low set up costs. The Texas secretary of state will charge a one-time fee of $300 (+$8.10 if you pay with a credit card) to register an LLC.
- No annual maintenance costs. There are no annual fees to keep LLC in good standing. The LLC does have to pay a franchise tax if it has substantial revenue (the franchise tax threshold changes. In 2022, the annual revenue threshold is $1.23MM)
- Perpetual existence. The LLC does not go away if the owner dies. This can be comforting for both clients and vendors.
- Tax flexibility. The owner of an LLC can choose how the LLC's income is taxed federally. Unless a tax election form is sent to the IRS, a single-member LLC is taxed just like a sole proprietorship (or what the IRS calls a "disregarded entity"). The SMLLC can elect corporate taxation (S-Corp or C-Corp), if desired.
- Transferability of ownership. The LLC member(s) can transfer their ownership interest in an LLC relatively easily.
Disadvantages of a single-member LLC
The disadvantage to operating a business through an LLC is the costs associated with forming and maintaining the entity.
Although formation/creation costs are relatively low for a single-member LLC, they are greater than the costs associated with a sole proprietorship. How much does it cost to create a single-member LLC?
Sole Proprietorship vs SMLLC
A sole proprietorship is what you have when one person does business without a state registered business entity (i.e., LLC, Corp, LP, etc). Sole proprietorships don't require any state filings or state filing fees and are generally thought of as cheap and easy to set up.
A sole proprietorship, however, does not provide limited liability for the business owner like an LLC would and, conversely, does not protect the business assets from the owner's personal liabilities.
SMLLC vs LLC
Frequently Asked Questions
Can an LLC have only one owner?
Can I convert an existing sole proprietorship into a Texas LLC?
Yes, you can convert your an existing sole proprietorship into a Texas LLC by (1) creating the LLC and (2) transferring any assets of the sole proprietorship to the new LLC.
Read more about converting a sole proprietorship into a Texas LLC.
Are there any benefits to having more than one owner?
Some states have taken the position that charging order protection (i.e., limiting the remedy of a judgment-creditor of an LLC member to a lien against that member’s interest in the company) is only available to multi-member LLCs. The idea being that charging order protection is for the benefit of the judgment-debtor’s business partners, and, if there are no partners, there is no need for the protection. Texas does not follow this position. However, if maximizing protection of the LLC's assets is the objective AND you are operating outside of Texas, there might be a benefit to having more than one member of the LLC.
If the owner of the LLC would prefer to report tax items related to the business separately from his personal taxes, then having a multi-member LLC would help. This is because a multi-member LLC is considered a partnership by default and is required to file its own tax return.
What are the differences between an LLC and a corporation?
LLCs and corporations are both entities. They both protect the business owners from the liabilities of the business. However, corporations have more formalities, are less flexible, and offer inferior protection for the business assets from the owner’s liabilities.
Corporations have more formalities and legal requirements to operate. For example, a corporation must conduct annual meetings of its shareholders and directors. There is no such requirement for LLCs. LLCs are more flexible in how their ownership and management structures are set up. They can be run like a sole proprietorship or more formally like a corporation.
Corporations are subject to double taxation (the corporation is taxed and so is the owner), whereas single-member LLC are disregarded entities, meaning tax items are reported on the owner’s personal tax return.
Although both entities protect the owner from the liabilities of the business, LLCs offer superior protection of the business from the liabilities of the owner. If a judgment is taken against an owner of a corporation, the creditor can foreclose on the owner’s shares and take control of the corporation. If a judgment is taken against an owner of an LLC, however, the creditor can only get a charging order against the owner’s membership interest (they cannot foreclose on the membership interest or force a liquidation of the company).
How is a single-member LLC taxed?
For federal tax purposes, a single-member LLC is considered a “disregarded entity” by the IRS and does not file a federal tax return. Instead, the owner of the LLC will report the LLC’s profits (or losses) on the owner’s tax return and will generally pay federal income tax on the LLC's net earnings. If the owner is an individual, he or she would report profits or losses on a Schedule within his or her federal tax return, just like a sole proprietor.
A single-member LLC can, however, elect to be taxed as an S-Corp or a C-Corp. Read more about LLC Taxation.
How is a multi-member LLC taxed?
For tax purposes, a multi-member LLC is taxed like a partnership. Unlike a single-member LLC, a multi-member LLC (or what the IRS refers to as a partnership) must file an annual federal tax return (IRS Form 1065) each year and issue K-1s to each member. The K-1 will inform each member/partner what portion of the LLC's profit to report on their federal tax return.
A multi-member LLC can, however, elect to be taxed as an S-Corp or a C-Corp. Read more about LLC Taxation and other tax consequences.
Can a husband and wife owned Texas LLC be taxed like a SMLLC?
What is the difference between an LLC and an S-corp?
This comparison is based on a common misconception that an S-corp is a type of entity like an LLC. An S-corp refers to an entity (LLC or Corporation) that has elected to be taxed under subchapter S of the IRS code.
If the SMLLC qualifies, its owner can elect for the LLC to be taxed as an S-corp. In this case, the LLC would be required to file an annual federal income tax return (IRS Form 1120-S). Read more about LLC Taxation.
Does a single-member LLC pay franchise taxes in Texas?
Does a single-member LLC have to file anything annually in Texas?
Does a single-member LLC need an EIN?
Can a single-member LLC have employees?
Can the member of a single-member LLC be an employee of the LLC?
Can my employer pay my Texas SMLLC?
Who can be a member of a Texas single-member LLC?
A member of an LLC can be an individual, an entity, or trust.
When should I consider forming a Texas SMLLC?
Ideally, you would operate the business through an LLC from inception. The cost of forming a Texas LLC may be prohibitive to businesses just starting out.
So, business owners may want to wait until the revenue from the business can support the cost of creating an LLC. For a business engaged in high-risk activities, forming an LLC will be a greater priority.
Can I convert a sole proprietorship to a single-member LLC?
Yes. A sole proprietor can form an LLC and begin operating the business through the LLC. The process of converting a sole proprietorship to LLC entails (1) forming the LLC; and (2) transferring necessary assets (and potentially some contracts/liabilities) to the new LLC.
Read more about converting a sole proprietorship to SMLLC.
Does a Texas Single-Member LLC have an operating agreement?
In Texas, LLCs are not required to have an operating agreement (aka company agreement), but most lawyers will highly recommend having one.
A company agreement is the governing document for the LLC. The company agreement can and should include clauses designed for maximum protection of the member from the LLC's liabilities and vice versa. If an LLC does not have a company agreement, the Business Organization Code will govern the LLC.
A Texas single-member LLC operating agreement is typically much shorter than a multi-member LLC operating agreement. You can contact the Copp Law Firm to ask about our single-member LLC operating agreement.
How do I form a single-member LLC?
A single-member LLC is formed by filing a Certificate of Formation with the Texas Secretary of State. The member can then file IRS Form SS-4 (the EIN Application) with the IRS to apply for and obtain an EIN for the LLC when an EIN is required.
When we create a single-member LLC, we handle the aforementioned items and also provide (1) a Company Agreement (the governing document for the LLC) with protective clauses; (2) a Unanimous Consent in Lieu Organization Meeting; (3) the required Membership Transfer Ledger; (4) any requested tax elections; and (5) an 8 page letter on how to use your new LLC.
What does it cost to form a single-member LLC in Texas?
It costs $308.10 to form a single-member LLC in Texas plus the service fee charged by the person (if any) that forms the LLC for you.
A single-member LLC must file a Certificate of Formation with the Texas Secretary of State (TXSOS). At the time of filing, the TXSOS will require payment of the applicable filing fee ($300). When this filing fee is paid online or via credit card, the TXSOS will charge an additional convenience fee of 2.7% or $8.10.
If you'd like to hire us to create your LLC for you, we charge $400 plus the TXSOS filing fee.
Zachary Copp, Esq.
Mr. Copp is a graduate of the University of Texas at Austin and the founder of The Copp Law Firm. He has personally formed over 3,000 Texas LLCs since 2015 and was recognized as a Rising Star by SuperLawyers® for seven straight years. See full bio →