You're about to read an advanced guide to “Single-Member LLCs”.
So, if you want to know:
- What is a single-member LLC?
- How do single member LLCs pay taxes?
- Do single member LLCs have alternative options to pay taxes?
- What is the difference between a single-member LLC and a sole proprietor?
- A whole lot more...
Then you must read this.
Let’s dive right in!
Single Member Limited Liability Company
When you form a limited liability company (LLC), the owners are called “members”.
For this reason, when you form an LLC, which only has one member, then your LLC is called a “single-member LLC” (SMLLC).
When your LLC has more than one member, your LLC is called a “multi member LLC”.
Both single member LLCs and a multi member LLCs have a protection veil, which protects the personal assets of the members.
The veil is commonly referred to as the “corporate veil”.
Generally, the purpose of forming an LLC for business is to obtain limited liability protection.
This means that if anyone creates lawsuits or debts against your company, then only your business entity is subject to liability, not you.
Your LLC is considered a different legal entity from yourself.
In other words, because the LLC provides a corporate veil, it separates your business from you.
Forming an LLC is the simplest way to structure your business to protect your personal assets.
So, you probably get it, by now, that with your single-member LLC (SMLLC), your personal assets will be protected by the corporate veil.
At this point, however, you probably want to know “How is a single-member LLC taxed?”
Good question.
Keep reading.
Single Member LLC Taxes
In short, your single member LLC will pay taxes the same as sole proprietors.
This is the tax classification for single member LLCs.
You will report all of your SMLLC profits or losses on Schedule C and you will file it with your 1040 tax return.
Even if you keep some funds in your SMLLC bank account (to cover future expenses), the IRS requires you to pay income tax on those funds.
The IRS does not require your SMLLC entity to neither pay taxes separately nor to file a return with them.
Single Member LLC Disregarded Entity
Don't get confused.
The IRS views single member LLCs (SMLLCs) as a disregarded entity only for taxes, which means that the IRS ignores the business entity specifically for tax purposes.
Instead, the IRS requires the owner of the SMLLC to file Schedule C and they collect taxes through the business owner’s personal income tax filing.
This is probably confusing.
How about I provide an example about a friend of mine?
Single Member LLC Tax Filing
My friend Warren started off his bake shop with a SMLLC.
He worked it part time.
In year #1, Warren earned a total of $40,000 from his bake shop and had $7,500 in expenses (for equipment, ingredients, and supplies).
As a result of Warren having his bake shop only on the side, he earned an additional $60,000 in salary from his part-time job as an employee of Dunkin Donuts.
So, in this instance, Warren used Schedule C to show his earnings and expenses from his bake shop.
Warren then attaches the Schedule C to his personal Form 1040, where he reports and pays taxes on his combined net income of $92,500 ($42,500 from his bake shop and $60,000 from his job at Dunkin Donuts).
IRS Single Member LLC
In regards to how you pay your SMLLC federal taxes, you must either use your (as the owner of the SMLLC) personal social security number or your employer identification number (EIN) for all information returns.
Single Member LLC EIN
Let me explain.
If a disregarded entity LLC that is owned by an individual is required to provide a Form W-9, Request for Taxpayer Identification Number (TIN) and Certification, the W-9 should provide the owner’s SSN or EIN, not the LLC’s EIN.
There are instances where the EIN of your LLC must be used.
If your SMLLC employs workers, or is required to file any excise tax forms, then your single-member LLC will need an EIN.
You can apply for an EIN (for your single member LLC) by filing form SS-4, Application for Employer Identification Number.
However, if your (disregarded entity) SMLLC does not employ workers and does not have excise tax liability, then you do not need an EIN.
Instead, you should use your name and TIN (assuming you are the owner of the SMLLC) when paying federal taxes.
In the event that you need an EIN for another purpose other than paying federal taxes, then you can still apply for and obtain an EIN.
For example, your state may require you to have an EIN.
Self Employment Taxes For Single-Member LLC
Due to the fact that your single-member limited liability company is a disregarded entity, you pay taxes the same way a sole proprietor would.
The IRS considers single member LLCs to be self-employed.
For this reason, the IRS considers your revenue to be earnings from self-employment.
As a result, your single member LLC’s revenue is subject to federal self-employment tax.
To clarify, self-employment tax is different from gross income tax.
For self-employment federal tax, you pay taxes on most of your income.
Up to an annual specified threshold amount, a self-employed individual pays taxes at a rate of 15.3%.
This is split up, 12,4% for Social Security and 2.9% for Medicare.
If a self-employed individual earns more than the specified threshold amount, only the 2.9% tax Medicare tax applies.
When the time arises to file your annual tax return, you'll need to include Schedule SE, Self-employment tax, with your Form 1040.
The IRS uses the Schedule SE form to compute and report how much they will obligate you to pay self-employment taxes.
Other Income Tax Options For Single Member LLCs
You have the option to pay taxes either as a corporation or an S Corporation.
Single Member LLC Tax Form
In order to obtain corporation tax status, you must file an election Form 8832 with the IRS, on behalf of your SMLLC.
However, in order to obtain S Corporation tax status, you must file Form 2553, on behalf of your LLC.
Please be advised that the change from a SMLLC only impacts your business taxes.
Nevertheless, your business will still continue to operate as an LLC.
It probably seems simple to change your SMLLC’s tax status.
However, the technicalities of changing your SMLLC’s tax status is complicated.
Therefore, we encourage you to seek help from a tax professional.
Creating A Single Memeber LLC
In order to form a SMLLC, there are a few EASY steps to follow.
- Firstly, the name you choose for your SMLLC is available.
For this reason, it is in your best interest to conduct a name search to confirm that name you intend to use is indeed available. -
After straightening out what the name for your SMLLC will be, choose a registered agent for your LLC.
A registered agent is an individual or a business entity that will accept lawsuits on your LLC’s behalf.
Normally, anyone (over the age of 18) who has a physical address in the state and is available during normal business hours can be a registered agent for LLC, including you. - At this point, file articles of organization or a certificate of organization (depending on which state you are in) with the state where you want to operate and pay your states filing fee.
- After registering your LLC with your state, you should prepare an operating agreement to determine how you want to operate your business.
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Next, most SMLLC will need an employer ID number (EIN), even if you don't have any employees.
For this reason, be sure to apply for your EIN, which will be used for federal income tax and employment taxes.
You can apply for an EIN here.
Some states require you to have an EIN prior to filing your articles of organization. - To protect your limited liability status and make record keeping easier, open an LLC bank account.
Single Member LLC vs. Sole Proprietorship
| Differences | LLC | Sole Proprietor |
|---|---|---|
| Difficulty To Form | ❌ Difficult | ✅ Easy |
| Guidlines To Follow | ❌ Follow Guidlines | ✅ No Guidlines |
| Tax Flexibility | ✅ Flexible | ❌ Not Flexible |
| Liability | ✅ Personally Protected | ❌ Personally Liable |
| Business Lifespan | ✅ Infinite | ❌ Constricted |
| Raising Capital | ✅ Easy | ❌ Difficult |
| Expanding Ownership Difficulty | ✅ Easy | ❌ Difficult |
Advantages Of A Single Member LLC
Here are the benefits of forming a SMLLC rather than staying solo.
- Liability protection: when you form a SMLLC, you set up a corporate veil.
The corporate veil protects your personal assets from ever being at risk for the liabilities of the business. -
Business lifespan: when you create a SMLLC, your LLC exists as a separate entity.
As a result, it is far easier to pass on ownership to another individual. -
Flexibility with taxes: when you form a SMLLC, you can elect varius tax treatments.
You can elect pass-through taxation (with the personal tax return), or you can elect corporate taxation. -
Expanding ownership: when you form a SMLLC, it is far easier to change from a single member LLC to a multi member LLC.
If you would have stayed a sole proprietor, the process would be far more difficult. -
Raising capital: when you create a SMLLC, you register your business with your state.
When a client or a customer will see that you registered your business with the state, you will convince them that your business is a professional business.
This may discourage potential plaintiffs from pursuing a lawsuit against you.
They will realize that you are a professional who is responsible and is not prepared to get pushed over for no reason.
Disadvantages Of A SMLLC
Here are some of the disadvantages of choosing to form a single-member LLC.
- Complex formation: when you form a SMLLC, you will file extensive paperwork. The reason why creating a SMLLC is such a complex formation is because a SMLLC is a separate entity.
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Following guidelines: when you form a SMLLC, you must do whatever it takes to maintain your liability protection by protecting the corporate veil.
In order to protect the corporate veil, you will need to follow the guidelines of operating an LLC.
Frequently Asked Questions
How to file taxes for single-member LLC?
In order for a single-member LLC to file and pay taxes, you will need to file Schedule C with your personal income tax return.
On Schedule C, wou report the income and expenses of your SMLLC.
After that, you attach that amount as income or loss on your personal tax return Form 1040.
What tax form does a single-member LLC file?
In the event that you, the individual, is the owner of the single-member LLC, you report your income and expenses on Form 1040, Schedule C, E, F.
However, if the owner of the single-member LLC is a corporation, then you report your LLC’s income and expenses on the corporation’s return, usually Form 1120 or Form 1120S.
Is my LLC a disregarded entity?
If you do not elect corporation treatment for your SMLLC, then your LLC is indeed a “disregarded entity”.
As a result, you should report your LLC’s income and expenses on your own, personal, federal tax return.
How does a single member LLC file taxes?
The IRS treats single-member LLCs as sole proprietors, specifically for tax purposes.
As a result, SMLLCs do not pay their own taxes and do not file a tax return with the IRS.
Instead, the owner of the single-member LLC must report all income and expenses of the LLC on his 1040 tax return.
Is it OK to be a single-member LLC?
The single-member LLC business entity is an aatractictive one. Single member LLCs protect their owners personal assets from any liability associated with the business.
For this reason, it is not ok to be a single-member LLC, but preferred.
However, the liability protection that a SMLLC provides is not as strong as the liability protection that a multi-member LLC offers.
What are the benefits of a single-member LLC?
- Tax Flexibility
- Liabilty Protection
- Infinite Business Lifespan
- Easy To Raise Capital
- Easy To Expand Ownership
- Difficult To Form
- Must Follow Guidelines
Is a single-member LLC the same as a sole proprietorship?
The IRS considers a single-member LLC as a “disregarded entity”.
Consequently, for tax purposes, the IRS does not consider your business as a separate entity from you.
For this reason, by default a SMLLC pays taxes the same way a sole proprietor would.
However, there is an option available for single member LLCs to pay tax differently.
What is a single-member LLC classified as?
For income tax purposes, the IRS considers a single-member LLC as a “disregarded entity”, not separate from its owner.
Unless the SMLLC files Form 8832 and elects different tax treatment, the IRS will treat the single member LLC as such.
However, for employment tax purposes and specific excise taxes, the IRS considers a single-member LLCs separate from its owner.
Does a single-member LLC need to issue 1099?
If the company you are paying files taxes as a single-member LLC, the IRS considers them to be a “disregarded entity”, for tax purposes.
As a result, the IRS views the payment as if you paid a “person”, for tax purposes, and you should file a 1099-NEC for them.
How do I pay myself as a single-member LLC?
In order to pay yourself as a single member LLC you make an owner’s draw.
As a result of your SMLLC being a “disregarded entity”, your SMLLC's income is considered your personal income.
At the end of the year, you report your earnings with Schedule C of your personal income tax return (IRS Form 1040).
Is it better to be a sole proprietor or LLC?
Generally, LLCs are better than sole proprietors.
The reason for this is because LLCs protect your personal asset while being a sole proprietor doesn’t.
When you think about it, protection from liability is one of the key benefits of being an LLC.
In an LLC, the owner is only liable up to the amount that he invested in the LLC.
Any liabilities beyond the amount of that investment is protected by a corporate veil.