Single-Member LLC Tax Return: Everything You Need to Know
A single-member LLC tax return has many advantages and disadvantages. Learn about a single-member LLC tax return and decide if it's the right choice for you.3 min read
Advantages of a Single-Member LLC
There are many good reasons to form a single-member limited liability company (LLC). Asset protection is one of the biggest advantages. Forming an LLC protects your personal assets from any debts or liabilities that come out of business activities performed by the LLC.
Say, for example, someone sustains an injury at a rental property owned by your LLC and wants to file a lawsuit. The person can sue only the LLC and not the LLC owner. In such a case, having an LLC protects your personal assets. If the person wins the lawsuit, all fees and damages come out of the LLC assets. Your personal assets are not touched as part of the case.
Disregarded tax entity status is another advantage single-member LLCs enjoy. Unless you opt for your company to be treated as a corporation, it will be considered a disregarded tax entity for federal income tax purposes. Just like a sole proprietorship, individual members report the LLC's profits and losses on their Schedule C, along with their self-employment income. This means the LLC does not file a tax return, which saves time and money.
Unlike traditional LLCs, there are no minimum tax fees for single-member LLCs. This can save you hundreds of dollars, especially in states with high minimum tax fees. For example, the minimum in California is $800.
Minimal regulatory requirements are a third advantage of forming an LLC. All you need to do to set up a single-member LLC is pay a small fee and file articles of incorporation with the secretary of state. There are few other compliance requirements. This is a huge benefit over an S corporation, which must comply with certain formalities. Regulatory requirements for S corporations include:
- Electing directors and officers.
- Holding periodic re-elections.
- Hosting an annual meeting for board members and shareholders.
A major advantage of having an LLC is that it lends credibility to your business for less cost and effort than forming an S corporation. Many customers and vendors take businesses more seriously if they have an official status tied to their company name. For this reason, many entrepreneurs find a single-member LLC is a great choice for them.
Disadvantages of a Single-Member LLC
While single-member LLCs have many advantages, there are also some disadvantages you should consider before deciding if it's right for your business. One of the main disadvantages is with regard to recordkeeping. Since there are few compliance requirements, many LLCs do not have a formal method for documenting their actions. In fact, many LLCs do not even have an operating agreement in place.
In the event of a lawsuit, the plaintiff can ask the judge to disregard the asset protection the LLC provides under the premise that the business is not legitimate due to its lack of recordkeeping and operating agreement. It is common for the court to uphold the request. As a result, the plaintiff can come after your personal assets to collect business debts and liabilities. The good news is that this type of situation is easy to avoid by creating an operating agreement for your LLC and maintaining good company records.
In every state except Wyoming, Nevada, and Delaware, single-member LLCs do not enjoy the same liability protection as multi-member LLCs. Most courts hold the belief that a single member does not act as a separate entity from the LLC. They think single-member LLC owners are less likely to keep their personal affairs separate from their business activity.
Creditors can come after personal assets to pay business debts and liabilities. This means if you cause a car accident that results in damages greater than your insurance coverage, it is possible for the plaintiff to come after your LLC assets to pay the difference. Having a formal operating agreement and maintaining strong records about all LLC activity is a good way to help maintain liability protection.
There are many advantages and disadvantages to a single-member LLC tax return. Knowing what they are can help you make the best choice for your business.
If you need help with a single-member LLC tax return, 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.