Single-Member LLC Tax Issues
A Single-Member LLC is a state entity that is considered to be “disregarded” by the Internal Revenue Service. Calling a Single-Member LLC “disregarded”, may sound odd, but the IRS has a point. Remember, the IRS is a taxing agency and their primary purpose is to get what they believe is coming to them – they’re not that concerned with legal issues that arise among state entities.
So what does it mean to you that the IRS disregards your Single-member LLC? The answer is that the single-member company instead file on Schedule C, Schedule E, or Schedule F, all which are individual-type tax returns.
If you as the owner/member of your Single-Member LLC choose not to file on your personal return, you may file a Form 8832 and request from the IRS that your company instead file as an S Corporation. Your entity will stay registered with the state of registration as a LLC, but you will file your tax return with the IRS as a S Corporation.
Provided the Form 8832 is accepted, your S Corporation tax return will then be filed on an 1120S from that point forward. Net income is passed to you, the member via a K-1. Your personal return will then include that K-1 net income from the Single-Member LLC-filing as an S Corporation.
Regardless of how many members are in your LLC, don’t sleep on the essentials. Have a qualified attorney to prepare an operating agreement, and be diligent about keeping the LLC and the member(s) separate in all cases. Keep the banking separate, and hire a respectable CPA to keep the books of the business. Doing so will also make your tax return cleaner at year end.
How About The Limited Liability Of A Single-Member LLC?
Not only will the IRS regard your single-member company as a disregarded entity, unfortunately the other courts may as well. And that’s not necessarily a good thing. Since an LLC’s limited liability legal position is based on the concept that the business and the individual are two separate entities, courts may not be quite as likely to separate the two either.
Attorney and fellow CPA Mark Kohler notes that only three states (Wyoming, Delaware, and Nevada) explicitly give Single-Member LLC’s the same protection from creditors, for example, as multi-member LLC’s. And, so without this explicit protection from the state, Single-Member LLC owner/members will not receive the same personal liability protection that is typical of a multi-member.
How Can I Restore The Limited Liability Of A Single-Member LLC?
Most qualified attorneys would first suggest that a single-member LLC owner consider the possibility of selling out a couple percent of the business to another partner – just make sure that the new partner is not your spouse, as courts would likely decide that the husband/wife partnership is still a single-member LLC in essence. But taking on a very small, non-spouse partner restores the original intent of the LLC, and also restores the charging order protection that is the hallmark of multiple-member LLC’s.
If taking on a small partner still concerns you, make the new, small partner a passive member with no decision-making responsibilities. Amend the organizing documents to reflect that the LLC is a manager-managed (non-member managed), and make yourself the sole manager of the new partnership
In any event, a qualified attorney and CPA should team to help give you wise counsel on the Single-Member LLC landmine, making your decision more well-informed.