Single-member LLCs are LLCs that have only one owner. According to the IRS, “a limited liability company (LLC) is an entity created by state statute. Depending on elections made by the LLC and the number of members, the IRS will treat an LLC as a corporation, partnership, or as part of the owner’s tax return (a “disregarded entity”).
By default, the IRS treats an LLC as a “disregarded entity” unless the owner files Form 8832 declaring that he or she wishes for the institution to be treated as a corporation. If the owner does not file this form, then the owner should reflect business activities on his or her personal tax return.
As a single-member LLC, the owner does not receive a salary, nor is the owner considered an employee. Instead, the owner takes funds and puts money back into the company as needed. The owner reports business income on their personal tax return to pay taxes, which include:
- Federal income tax
- State income tax
- Social Security
Owners are responsible for paying the entirety of Social Security and Medicare taxes, much like for those who pay self-employment taxes. Employers typically pay half of these taxes, while employees pay the other half. But because a single-member LLC doesn’t have any other workers, and the owner reports income on their personal tax return, he or she must pay self-employment taxes on the earnings.
The two primary benefits of single-member LLCs are pass-through taxation and liability protection. By passing business income through to their tax returns and treating it as personal income, owners only have to pay tax on it once. Granted, they’ll need to pay self-employment taxes. But they avoid having to pay taxes at the corporate tax rate and then again at the personal tax rate. Single-member LLCs do not pay business taxes at either the federal or state levels.
As we’ll detail below, some businesses must first pay taxes at the corporate tax rate, which is 21% at the national level. Then, after that, business owners receive a salary, which is then taxed again on personal income tax returns. Pass-through taxation allows businesses to skip this “corporate tax rate” step and report everything on personal returns.
The other benefit to a single-member LLC is that the business is considered a separate legal entity for liability purposes. This means that the owner is not held responsible for any debts or obligations accrued by the company. So if the business were to rack up debt, creditors could not come after the owner’s personal assets, like their bank accounts or cars.
To start an LLC, you’re going to register with your local Secretary of State’s office. This likely requires a filing fee. Additionally, you’ll probably need to submit annual reports every year. Lastly, if you were to pass away, you could give ownership of the LLC to someone else.