How Does a Single Member LLC File Tax Return: Everything You Need to Know
How does a single member LLC file tax return each year? An LLC with only one owner is known as a single-member LLC or SMLLC. 3 min read
How Does a Single Member LLC File Tax Return
How does a single member LLC file tax return each year? An LLC with only one owner is known as a single-member LLC or SMLLC. An SMLLC, which is a form of an LLC, is an entity that separates a business from its owner, which offers liability protection.
An SMLLC also has a pass-through taxing mechanism that allows its owner to pay income taxes through a business on the owner’s personal tax return. That is to say, the IRS will not consider an SMLLC as an entity separate from its owner for in respect of filing tax returns. Rather, the IRS will treat the SMLLC as a sole proprietorship and disregard the SMLLC. As a result, its owner will pay taxes for the SMLLC as part of the owner’s personal tax returns.
Pros and Cons of Creating an SMLLC
1. Asset Protection
Pro: AN SMLLC acts as a shield that protects an owner’s personal assets from liabilities associated with the SMLLC’s business.
Con: The limited liability concept is predicated on the notion that a company and an individual are separate entities. Since an SMLLC is a disregarded entity, an SMLLC owner is less likely to separate personal and business affairs separate, so a court may be keener to pierce the corporate veil.
Con: State laws generally offer more protection to multiple-member LLCs over SMLLCs. According to one source, there are 18 states that disallow a plaintiff from accessing property in an LLC to help satisfy personal obligations but there are just three states that allow this legal right to an SMLLC.
To keep asset protection intact, some recommend that an owner of an SMLLC maintains a formal operating agreement that outlines how the SMLLC functions.
For example, say your LLC owns a rental property and someone slips and falls on that property. The victim wants to sue you, the property owner. Because it belongs to the LLC, the plaintiff can only sue the LLC, not you. If the plaintiff ultimately wins, he or she can only collect from the assets that are owned by the LLC, not you, the LLC owner. This same limited liability protection works for any of the LLC’s debts.
LLCs have a "pass through" taxation scheme. Instead of the business entity paying income tax on business profits, the profits are passed through to the members, who will then pay the income on their personal tax returns. As a result, the IRS does not recognize an LLC as its own business entity. Members, by default, pay taxes just as a sole proprietor pays taxes. Note that an SMLLC does not pay business tax on the federal level, and, in a number of states, SMLLCs pay no business tax as well.
3. Ease of Use
Pro: Running and operating an SMLLC has few legal requirements. The state authorities do not require you to file an annual report or annual minutes. In fact, you have no obligation to keep minutes.
Pro: Similar to a sole proprietor, the member of an SMLLC has complete control over business operations. The member makes all business decisions and receives all distributed profits. An SMLLC does not have to wrangle with shareholders or the board of directors.
Pro: Although there is the increased paperwork associated with an LLC, an LLC is less formal than a corporation.
Con: The informal nature of an LLC makes it more difficult to get credit, to raise equity capital, and to establish a value on the business as opposed to a corporation.
Typically, when applying for a loan or trying to establish a line of credit with a lender, the lender will consider how the business is structured and how profits are dispersed. This contrasts with a corporation wherein profits are distributed to shareholders, making them less risky.
If you need help with filing taxes for your SMLLC, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.