Single Member LLC Definition
Single Member Limited Liability Companies are LLC’s wholly owned by one member. The Internal Revenue Service (IRS) treats these companies as “a disregarded entity” in tax terms. The entity is disregarded as separate from the member for income tax purposes. In other words, the business’s income flows through to the owner’s personal income tax form; however, this does not mean that the single member LLC avoids other taxes.
As a single member LLC, you have to option to act as a corporation. This changes the tax implications for the business. Taking this option into consideration is important when filing the business. The member should also consider the tax implications of having all income taxed at a personal income tax rate versus a corporation tax rate. It is best to ask a tax professional before filing.
Furthermore, it takes careful consideration about the type of company and whether it will require significant reinvestment of profits. A single member LLC can benefit from being taxed as a corporation if it plans to reinvest large amounts of its profit. This prevents all the profits from being taxed at a personal income tax rate just to be reinvested into the company.
Sole Proprietorship vs LLC
If the IRS taxes a single member LLCs like a sole proprietorship, then what makes them different than a sole proprietorship? Sole proprietorships lack limited liability protection. Any liabilities taken on by the business puts the owners at personal risk. For example, imagine a local restaurant is a sole proprietorship. If someone is injured on the restaurant’s property, then they can hold the owners of the restaurant personally responsible. Insurance can help protect the owners, but sole proprietorships lack the inherit protection that limited liability companies have; however, if a LLC breaks the corporate veil, then its owners are subject to liabilities personally as if it was a partnership or sole proprietorship.
Limited liability companies offer the members more protection than proprietorships or partnerships. They are a mix between partnerships and corporations with several benefits from both. It is a recent type of entity. As a result, it has become one of the most popular. Furthermore, the formation of limited liability companies in states without an income tax is very popular. In the following states, single member LLC members avoid paying a state income tax on top of the federal income tax.
- New Hampshire
- South Dakota
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