The limited liability company, better known as an LLC, is a favorite business entity among small businesses because of the incredible flexibility involved in running it and the simplicity of the tax situation that arises. Well, that is unless you are the sole owner of the membership interest in the company.
You’ve been making stained glass for years. Over that time, you’ve advanced from making works of “art” that are crimes against nature to the point where your work is church worthy. And people are telling you about it! Given this, you decide to make a business out of it and form an LLC. The first year goes well and you make a nice profit. You file taxes [complaining like a good American!]. Three months later, you get a notice from the IRS rejecting your tax returns!
Okay, so what happened? The answer is found in the fact the states failed to confer with the IRS before passing legislation allowing a single person to own all the interest in an LLC. The problem arises with the pass through nature of the LLC. It is based on the fact the LLC can choose to be taxed as an LLC. To be a partnership, however, you must have two or more persons doing business. Since there is only one, the IRS considers this form of LLC to be a “disregarded entity” for tax purposes and requires the single owner to report all the taxes on their Schedule C as though they were a sole proprietor.
The single member LLC is actually a great little entity for business purposes. The small business owner usually has to spend most of their time keeping the business up and running. The ability to avoid the corporate formalities of a corporation is definitely a positive benefit, but only if you understand what you are getting into from a tax purpose and can plan for it.