Single Member LLC Explained (How Does It Work?)

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Single-Member-LLC

A Limited Liability Company (LLC) is a business entity with tax and liability advantages. It is formed by filing the appropriate documents with the state. The LLC’s tax situation will vary depending on the choices that are made during the formation process. The IRS classifies the LLC as a partnership, a corporation, or a disregarded entity.

So, if the LLC has only a single member, it can be treated as a single-member LLC, which is treated similarly to a sole-proprietorship. Alternatively, if the LLC has two or more members, the IRS will classify it as a partnership (or aka Multi-member LLC). This will determine how the business is taxed for Federal Income Taxes. Although, if the member or members would prefer to be treated as a corporation, they could file Form 8832 and opt to be treated as a corporation.

About The Single-Member LLC’s Owner

Assuming the single-member LLC elects not to be treated as a corporation, then it is instead a “disregarded entity.” The activities of the LLC will be documented on the owners’ own tax return.

This generally means that individual owners will treat income from a single-member LLC the same as if it was a sole proprietorship. This means paying self-employment taxes on the income. For an individual, the LLC’s activity should typically be documented on

  • Form 1040 or 1040-SR Schedule C, Profit or Loss from Business (Sole Proprietorship) 
  • Form 1040 or 1040-SR Schedule F, Profit or Loss from Farming
  • Form 1040 or 1040-SR Schedule E, Supplemental Income or Loss

For a single-member LLC owned by a corporation or a partnership, it will need to be documented as a division of the organization. This will need to be documented on the owner’s tax return the same as other divisions.

Single-Member LLC Taxpayer Identification Number

On federal income tax forms, the owner of a single-member LLC that has been classified as a disregarded entity will simply use their own Social Security Number (SSN) or employer identification number. This includes reporting for income taxes as well as information returns.

You may not need to file for an EIN for a single-member LLC if you do not have any employees and don’t have excise tax liabilities.  However, you may not be able to open a business bank account without an EIN, and there are some states that require single-member LLCs to file for one.

In this case, you will need to file Form SS-4, Application for Employer Identification Number. This form has more information on applying for an EIN number.


SMLLC Requirements for Certain Excise Taxes and Employment Taxes

An-LLCs-Tax-Obligation

Though a single-member LLC  classified as a disregarded entity will simply be disregarded for most federal tax purposes, under regulations (T.D. 9356), certain excise taxes for single-member LLCs will actually treat the LLC as the taxpayer itself instead of the owner. This will apply for a certain set of excise taxes accruing as of Jan. 1, 2009.

A Limited Liability Company that consists solely of one member is classified as a disregarded entity for the purposes of applicable income taxes will be treated as the taxpayer for both certain excise taxes and employment taxes. If the single-member LLC pays wages after Jan. 1, 2009, then the LLC will use its own name and EIN when it goes to pay its employment taxes.

The single-member LLC will also use its own name and EIN when it fills out certain forms such as: registering for the excise tax activities on Form 637, both to report and pay the excise taxes contained on Forms 2290, 11-c, 720, and 730, or, lastly, to get back money and claim your refunds, payments, or credits that are contained in Form 8849. For more information, check out the employment and excise tax forms.


Community Property and Joint Ownership of a Single-Member LLC

In some states, a business may belong to both spouses as community property. However, many LLC owners wondered if this applied to a single-member LLC. Luckily in Rev. Proc. 2002-69 the IRS cleared that issue up.

The IRS rules create certain requirements for a qualified entity for these purposes. These include:

  • Owned Solely by the Couple: The business entity must be owned solely by the two spouses in a state, territory, or even foreign country that permits community property for which the business entity applies.
  • Not a Corporation: The business entity must not be classified as a corporation according to the rules contained in IRC §301.7701-2.

If the business entity is qualified, then the couple can treat the entity in the following ways:

  • Disregarded Entity: For federal tax purposes, the Internal Revenue Service will permit the couple to treat the business as a disregarded entity.
  • Partnership: If the couple wishes to treat the entity as a partnership for federal tax purposes instead of a disregarded entity, they may.

If, after assuming a position on reporting for Federal Taxes, the couple wishes to change how the entity is classified, it will be treated as a conversion of the entity.

It’s important to consider that these rules only apply for an LLC owned by a couple in states or other specified regions permitting community property. In all other cases, the LLC will need to be treated as a partnership.


Best Services to Help You Start Your SMLLC

There are a number of excellent services out there that can help you form your single-member LLC. Two of the best of them are ZenBusiness and Northwest Registered Agent.

#1: ZenBusiness

This company can file your LLC registration forms for you, serve as your registered agent, and supply you a template for a business Operating Agreement, all starting at $49. They also have a Worry-Free Compliance Guarantee included in their Pro and Premium plans that will alert you of any compliance requirement you need to fulfill to keep your business in good standing.

$49

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Form an LLC today with ZenBusiness for only $49. They Have 98% customer satisfaction rating and over 4000+ verified reviews. Check here to see our full Zenbusiness review.


#2: Northwest Registered Agent

Northwest has a strong reputation as a provider of LLC formation services. They offer a DIY option that can help guide you through the process for free or two paid options. For $225 plus state fees, Northwest can take care of the whole process for you, including serving as your registered agent for a year. However, if this is too much all at once, Northwest offers a monthly payment option that divides everything up into 12 easy payments. Either way, Northwest can perform all the filing for you.

Starting from $35

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Rating: 4.9/5
Review count: 4150+

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Form an LLC today with Nortwest. They have 98% customer satisfaction rating and over 4150+ verified reviews. They will include 1 year of free registered agent service! Here’s a full review of Northwest.


Conclusion

An LLC can be a great option for both simplicity and savings on your federal taxes. You may be familiar with filing for an LLC with a group of owners, but many are confused when it is only one.

Luckily, though confusing at first, SMLLCs really aren’t that complex. Essentially, they are the same as other LLCs but with different classifications for federal taxes. So, hopefully, this has cleared a few things up and relieved any concerns that may have been holding you back from forming your LLC.


For more info on Single-member LLCs:

This can give you more useful info on single-member LLCs:
https://www.irs.gov/businesses/small-businesses-self-employed/single-member-limited-liability-companies

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About the Author
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Founder & author

Ian Broderick is an avid author and owner of LLCGuys.com. He's been involved with the LLC formation field for over 4 years. On top of that, he has worked in several well-known LLC formation service providers. Now he decided to share his knowledge and advice with everybody. Since there are a lot of questions and concerns surrounding this field - his aim is to make LLCGuys a top-notch information provider in regards to LLC creation, service reviews and etc..

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