LLC Individual: Everything You Need to Know
An LLC individual is one person who wants to form an LLC. An LLC is a structure that has similar features to that of a corporation and a sole proprietorship.3 min read
2. Federal Tax on Single-Member LLCs
3. Limited Liability Protection Exception
An LLC individual is one person who wants to form an LLC. An LLC, or Limited Liability Company, is a hybrid business structure that has similar features to that of a corporation and a sole proprietorship. Similar to a corporation, the LLC owners enjoy personal protection, as their personal assets cannot be affected by the outstanding debts of the business. Similar to a sole proprietorship, the LLC profit and losses are reported on the sole owner’s personal income tax return.
A sole proprietorship is a company that is owned and operated by only one person. If you don’t operate as a corporation or limited company, and there is only one owner, then it defaults to a sole proprietorship. As noted, all profits, losses, expenses, and deductions of the business are reported on the owner’s individual tax return, since the business itself doesn’t file corporate income taxes.
Can an Individual Operate an LLC?
The short answer here is yes. An individual can in fact own and operate a single-member LLC, which defaults to a sole proprietorship for tax purposes. However, an LLC cannot be a sole proprietor.
State statutes regulate the requirement and oversight of LLCs. For that reason, there is usually a lack of uniformity since different states view the LLC in different ways.
While a single-member LLC can operate similarly to that of a sole proprietorship in terms of management structure and taxation, the owner isn’t personally liable for the debts and obligations of the business, which is one of the biggest advantages to operating as an LLC.
If you are the sole owner of an LLC, you can hire employees to help you run your business. However, even though you are hiring employees to help you oversee the daily operations, you are still the sole responsible party for ensuring that the LLC abides by all federal, state, and local rules and regulations. This is because the employees are not owners (members) in the company.
Federal Tax on Single-Member LLCs
The Internal Revenue Service (IRS) doesn’t recognize LLCs as a business entity. For that reason, the IRS requires that the owner of the LLC choose how he or she wants the business to be taxed. If the owner fails to make the decision, the individual LLC will automatically be taxed as a sole proprietorship.
A single-member LLC can be taxed as either a sole proprietorship or a corporation. If you choose to operate as a sole proprietorship, the IRS will recommend that you report any income from the LLC on your own personal tax return (Schedule C of Form 1040). You might also need to pay self-employment tax if you choose to elect taxation in this manner.
If you choose to be taxed as a corporation, however, you will need to pay corporate income tax in addition to personal income tax, particularly if you pay yourself dividends through the company. Therefore, the LLC will pay corporate income taxes on its profits. Thereafter, any profits that were paid to you in the form of dividends will be taxed again on your personal tax return. With that said, choosing to be taxed as a sole proprietorship or corporation doesn’t change the legal nature of your LLC. So, you will still enjoy limited liability protection and a flexible management structure.
Limited Liability Protection Exception
While the LLC business structure provides personal asset protection, there are some exceptions to this rule. For example, if any of the following circumstances are present, you might be personally liable for the debts and liabilities of your LLC:
- If you fail to properly capitalize your single-member LLC
- If you mix personal and business assets
Your company might not be capitalized if it doesn’t have enough money or assets to properly function.
In order to prevent the above-mentioned issues, you should be sure that you have enough money saved before forming your single-member LLC. Furthermore, after forming your business, open a business bank account and business credit card to separate any and all business profit and expenses from your own personal assets and expenses.
If you need help forming an LLC in California, or learning more about the costs of forming a California LLC, 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.