Single-Member LLC Taxation: Everything You Need to Know
Single-member LLC taxation has many advantages and disadvantages. Learn about single-member LLC taxation and decide if it fits your business.3 min read
Single-member LLC, or limited liability company, taxation has many advantages and disadvantages. Find out everything you need to know about single-member LLC taxation to decide if it is the right choice for your business.
What Is a Single-Member LLC?
A single-member limited liability company (LLC) is an LLC that has only one owner. Unlike a sole proprietorship, it offers some limited liability protection. It also lends credibility to your business. You can pay the LLC's federal income taxes on your personal income tax as a pass-through entity.
If your business has only one owner, you are not eligible to form a traditional LLC, but you can set up a single-member LLC instead. This is a great option for many entrepreneurs.
Advantages of a Single-Member LLC
There are several benefits to setting up a single-member LLC. Unlike S corporations that must comply with certain corporate formalities, LLCs have minimal regulatory requirements.
S corporations need to elect directors and officers, held periodic re-elections, and host an annual meeting of shareholders and board members. LLCs do not need to do any of these things. All they need to do is pay a small fee and file articles of incorporation with the local secretary of state.
An LLC can elect a corporation status for tax purposes. Single-member LLCs that do not make this election are a disregarded entity. As such, the LLC does not need to file a tax return. To save on tax preparation fees, you can report your LLC income on Schedule C.
Unlike traditional LLCs, single-member LLCs do not pay minimum tax fees. This can save you hundreds of dollars, especially if you live in a state with high minimum tax fees for LLCs, such as California.
One of the biggest advantages of an LLC is the limited liability protection it offers business owners. Their personal assets cannot be seized to cover the company's liabilities or debts. LLCs offer another level of liability protection called "charging order protection." It prevents the company's assets from being used to settle your personal liabilities or debts.
Personal creditors can only obtain a charging order for the percentage of the LLC's profits that you control. In theory, since there is only one owner of a single-member LLC, the LLC is not on the line for any of your personal debts.
Disadvantages of a Single-Member LLC
There are some disadvantages to forming a single-member LLC that you should know. One of the biggest disadvantages relates to limited liability. Courts can choose to disregard limited liability in certain cases. Many single-member LLCs do not do a good job of keeping their personal and business matters separate. Only three states offer limited liability protection to single-member LLCs.
A good way to make sure your protection remains in place is to create a formal operating agreement to govern the LLC's functions. Another way to make sure you maintain your liability protection is to bring at least one other owner into your company. For example, you can give a close family member, such as your child, ownership of a small percentage of the company. Multi-member LLCs have more protection than single-member LLCs.
Your business partner does not need to help manage the LLC. You can choose to make the LLC manager-managed versus member-managed so you remain in control of the business as its only manager and decision-maker. Keep in mind that your spouse does not qualify as a partner. The Internal Revenue Service (IRS) counts you and your spouse as one owner.
Things to Do When Operating a Single-Member LLC
As the owner of a single-member LLC, you need to do the following things:
- Elect corporate tax treatment upon filing your LLC by completing IRS Form 8832, Entity Classification Election.
- When filing a tax return as a disregarded entity, put the LLC's tax identification number on your Schedule C.
- Keep excellent records of all business activity, including all meeting minutes and resolutions, company decisions, and membership role updates.
- Sign all business documents as a representative of your LLC.
There are many advantages and disadvantages to single-member LLC taxation. Knowing what they are can help you make the best choice for your business.
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