LLCs or Limited Liability Companies have become a popular way to form a small business. For taxing purposes, a multi-member LLC can be a partnership or a corporation and has to choose which so the IRS knows how to levy taxes. But what if you are the only member of your LLC?
Many one-person businesses owners have taken the business form of sole proprietorship. That classification leaves that person open to lawsuit not only against their company, but against them personally, putting their personal wealth at risk. The LLC solves that problem making the business a separate entity from the owner.
LLCs owned by a single person are called, quite obviously, single member LLCs or SMLLC. It’s a bit of alphabet soup, but it’s important come tax time.
While an LLC can choose to be taxed as a corporation or as partnership, a single member LLC can choose to be taxed as a corporation or a “disregarded entity.” What that means is the LLC will be taxed like a sole proprietorship.
Some confusion has developed over employment tax requirements for an SMLLC that files taxes as a sole proprietorship. The SMLLC has two options: using the name and employer identification number assigned to it or using the name and EIN of the person who owns the company. However, the IRS stresses that if someone files taxes under their name, they are still responsible for collecting, reporting and paying over the employment taxes.
State laws vary, making filing taxes under an SMLLC even more confusing. While the federal government does not require single member LLCs to have an EIN, some states do require it. EIN are required to open a bank account and some states require a company to have an EIN for tax filing purposes.
The best thing to do to get through the tax mire is consult an expert to make certain you are filing correctly. The IRS warns that misfiling can result in complicated problems needing the assistance of professionals to correct. Translation? Money, frustration and time wasted, things no small business owner wants to face.