Tax Form for LLC Single Member: Everything You Need to Know
A tax form for a single-member LLC is a form that must be completed by the sole owner of a limited liability company.3 min read
2. Single-Member LLC Pros
3. Cons of Single-Member LLCs
A tax form for a single-member LLC is a form that must be completed by the sole owner of a limited liability company.
What is a Single-Member LLC?
A limited liability company, or LLC, is a business formation option that separates the owner from the business, offering more protection against personal liability for business debts. Another benefit of forming an LLC is that this business type is a pass-through entity, which means the profits of the company are passed through to the business owner, which must be reported on their personal tax return.
Some business owners prefer to form sole proprietorships since they are easier and more cost-effect to start. However, a sole proprietorship may not offer the same level of business legitimacy as another business formation. Additionally, sole proprietorships don't provide limited personal liability to the owner.
An LLC with just one owner is referred to as a single-member LLC, or SMLLC. When a business has only one owner it can't be a standard LLC, but it can be an SMLLC. It's easier to maintain an SMLLC than it is to maintain a traditional LLC but it also offers the benefits, such as limited personal liability.
Single-Member LLC Pros
An S corporation must observe and keep up with certain formalities and regulations that an LLC doesn't. Those include:
- Holding period re-elections
- Electing officers
- Holding an annual meeting of the stockholders and board members
- Electing directors for the board
States also don't require LLCs to file annual minutes or reports. In fact, keeping minutes isn't really a necessity for an LLC. Another benefit is the cost; maintaining an SMLLC is less expensive and simpler than a multi-member LLC.
The regulatory requirements to maintain compliance for an SMLLC are less complex than those required of traditional LLCs. The first step in forming an SMLLC is writing the articles of organization and filing them with the Secretary of State's office. With the articles, you must also pay a filing fee. Once you have completed this step, there are few additional requirements to maintain compliance.
The owner of an SMLLC can elect for corporate taxation, which is also an option for the members of a multi-member LLC. If you don't elect for taxation as a corporation an SMLLC, by default will be treated as a disregarded entity. This means that the LLC doesn't have to file a separate tax return. Instead, all income from the business is reported as self-employment income on Schedule C of the personal tax return form. As a result, the LLC owner can save on the cost to prepare complex business taxes.
SMLLCs aren't subject to minimum tax fees for operation. This is especially beneficial for business owners in states with high minimum tax fees, such as the $800 annual tax fee in California.
Cons of Single-Member LLCs
Although SMLLCs do provide limited liability protection, this type of business formation doesn't have the same level of protection as a multi-member LLC. For example, if an LLC is the owner of a rental property and the renter becomes injured while on the property, the renter would have to take legal action against the LLC, not the LLC owner. If the renter won the lawsuit, only assets owned by the LLC would be at risk. The LLC owner's personal assets wouldn't be at risk.
Similar liability protection exists on LLC debts, protecting the owner from being held personally responsible for the debts of the business. In theory, the SMLLC owner can take advantage of the limited liability protection for any business debts. This rule also applies on the opposite side: an LLC isn't responsible for its owners' debts or liabilities. However, the liability protection extended to a business owner isn't a guarantee. A court of law could overturn it.
The idea behind limited personal liability is that the owner and the company exist as separate entities. However, an owner of an SMLLC might find it more difficult to separate business and personal affairs because this business type is a disregarded entity. As a result, a judge or court could overturn the limited liability.
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