What is a single-member LLC?

A Limited Liability Company (LLC) is a legal form of business established by state law. LLCs are treated as corporations, partnerships, or separate tax returns depending on how many members they have and what they choose to do with their LLC’s assets (a “disregarded entity”). If it doesn’t file Form 8832 and elect to be treated as a corporation, a domestic LLC with at least two members is treated as a partnership for federal income tax purposes. Only if a single-member LLC files Form 8832 and affirmatively chooses to be treated as an entity separate from its owner is it considered a corporation for income tax purposes. However, an LLC with only one member is still independent for employment tax and certain excise taxes.

 

Initiator of a One-Member LLC

An LLC with just one member is referred to as a “disregarded entity,” which means that its activities must be reported on the owner’s federal tax return. If a single person owns the LLC, the LLC’s activities will be reflected on:

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

 

Just like a sole proprietor, an individual who owns and operates a trade or business as a single-member LLC is subject to self-employment taxes on the net earnings. Single-member LLCs should be included on the federal tax returns of their owners if a corporation or partnership owns them.

 

Identification Number for Taxpayers

Single-member limited liability companies (LLCs) classified as “disregarded entities” must generally use the owner’s SSN or EIN for all information returns and reporting related to federal income tax. According to the Internal Revenue Code, Form W-9, Request for Taxpayer Identification Number and Certification (TIN) should be filled out by an LLC owned by a single individual and not by the LLC itself.

 

The LLC’s EIN must be used for specific Employment Tax and Excise Tax requirements, as will be discussed below. If an LLC has any employees or needs to file any excise tax forms listed below, it will need an EIN. A federal tax identification number (EIN) is required for most new disregarded-entity LLCs. Form SS-4, Application for Employer Identification Number, is used by an LLC to apply for an EIN. Information on obtaining an EIN can be found on Form SS-4.

 

Because it has no employees and excise tax liabilities, a disregarded single-member LLC does not require an EIN. When it comes to opening a bank account or complying with state tax laws, a single-member LLC can apply for and obtain a federal tax identification number (EIN) from the Internal Revenue Service (IRS).

 

Issues of liability

There are no exceptions for sole proprietors when it comes to business obligations. Personal assets, including bank accounts, homes, and other property, can be seized if a business is in debt, files for bankruptcy, or dissolves.

 

There are many advantages to forming a single-member LLC, such as shielding owners from the business’s liabilities. However, limited liability protection isn’t as robust as for traditional LLCs (those with multiple members).

 

A court can overturn any business owner’s liability protection. In the context of limited liability, it is assumed that the individual and the company are two distinct entities. It is more likely that the courts will pierce a single-member LLC because the owners are less likely to keep their personal and business affairs separate.

 

An LLC’s assets may be subject to garnishment if the corporate veil is breached.

If you want to keep your liability coverage intact, you must cross your T’s and dot your I’s. To ensure that the LLC operates under both federal and state law, single-member LLC owners should maintain a formal operating agreement. It is also essential for owners to keep their business and personal finances separate.

 

With a single-member LLC, how do you pay yourself?

There is no salary or wages for a single-member LLC owner; you can take money out of the business whenever you want. A “draw” is a term used to describe these payments because you’re taking money out of your ownership stake in the company. In the final analysis, the company pays you only if everything else has been paid.

 

The money you take out of your owner’s account each year is tax-free. Your tax return includes a Schedule C for your business’s net income (profit). Additional taxes must be paid for Social Security and Medicare on the business’s net income every year in addition to income tax.

 

Do you know how to dissolve a one-member LLC?

Because of federal, state, and local regulations, it can be challenging to dissolve an LLC.

You must file specific legal documents with your state to formally dissolve the business. These documents vary by state. For state income tax and sales tax purposes, you must also notify your state’s taxing authority. Hire a tax lawyer to ensure that everything is done correctly.

Additional requirements for reporting income and employment taxes to the Internal Revenue Service (IRS) (if you have employees). Your Employer ID Number should be canceled by notifying the IRS. A fictitious name (also known as a “doing business as,” or “DBA,” registration) may necessitate notification to your city hall.

 

A single-member LLC can be formed in many ways.

If you already have a single-member LLC, the process of converting to a single-member LLC will be much simpler. An LLC can be formed even if your company is currently a sole proprietorship, which means it has not been registered with the state. You must file articles of organization with the state where you intend to conduct business to register your LLC. You’ll also need an employer identification number (EIN) for the LLC, which is a federal tax identification number.

 

As a partnership or corporation, it is more difficult to change the structure of your business. To form an LLC, you must first dissolve the previous company. A licensed tax attorney will be needed in both cases to ensure that everything is done correctly.