One of the core elements involved in the process of business formation is the choice of a proper business structure. The legal entity chosen for a new company will largely impact it legally and for tax purposes.
In this article, you will have a full overview of single-member LLC taxes.
Single-Member LLC Taxes – The Basics
Well-known for their flexibility and pragmatism both in terms of formation and management, limited liability companies (LLCs) are business entities that combine the advantages of corporations and partnerships.
Used primarily for business operations, it is not uncanny to find individuals forming LLCs for asset protection and tax-saving strategies. LLCs offer a reliable way to hold the title of assets like real estate, stocks, or other assets.
As assets titled in the name of an LLC are no longer considered part of the original owner’s estate, these assets allow beneficiaries or heirs to inherit them directly without necessarily going through probate.
Also referred to as “members,” the owners of LLCs enjoy limited liability protection. The legal structure of LLCs creates a layer of separation between the member’s personal assets and the company’s assets.
Accordingly, neither the LLC is responsible for the liabilities of its members, nor the members are responsible for business liabilities. This is one of the reasons why banks and insurance companies cannot be formed as LLCs, as it would be illogical not to hold the shareholders of such entities accountable in case of failure.
Tax Advantages of Single-Member LLCs – What You Need to Know
LLCs can be compared to corporations when it comes to protection against personal liability, but with superior advantages in terms of flexibility and the lack of formalities. Another interesting aspect of LLCs is taxation.
Depending on the members’ purpose and circumstances, an LLC can assume different forms for tax purposes. A single-member LLC is referred to as a “disregarded entity” for tax purposes. The term “disregarded” allows the owner to report the LLC’s activities through a regular income tax return.
The forms provided by the Internal Revenue Service (IRS) for this purpose include Schedule C, E, or F, the same forms filed by sole proprietorships.
Another fundamental aspect of LLCs is the possibility to elect C-Corp or S-Corp status for tax purposes. When filing “Articles of Organization,” the LLC’s only owner can select whether the company will be treated as a regular corporate entity (C-Corp) or an S-corporation.
A single-member LLC treated as a C-Corp for tax purposes will expose its owner to double taxation, which means reporting taxes on the income generated by the company and the dividends received on the owner’s account.
Conversely, single-member LLCs that elect S-Corp status for tax purposes enjoy “pass-through” taxation. Hence, all the entity’s income and losses pass through the company directly to the owner’s personal returns. This way, it is possible to avoid double taxation and save money in the process.
Do You Need Help Setting Up a Single Member LLC? – Immediately Contact an Expert CPA
Waste no time with uncertainty. Contact Edward D. Quilca, CPA by calling (786) 310-5582 or emailing [email protected] to find the best tax strategy for your single-member LLC.