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The single member LLC is the simplest way to have the protection of incorporation with the simplicity of doing business under your own name. If you’ve spent any time on this site at all, you already know all about how an LLC protects your personal assets from business creditors.
You might also have read about how incorporating your business can improve your image with potential business partners, wholesale suppliers and some customers (particularly if your customers are other businesses).
Now, if only maintaining and doing the annual paperwork for your LLC could be simple and easy, you’d jump right in and form one today. Well there’s good news. The single member LLC is about as easy as it gets, particularly during tax time.
What is a single member LLC?
A single member LLC is just what it sounds like. It’s an LLC with only one member who owns shares in the company. Nothing special is needed in your articles of organization to create a single member LLC.
What’s so easy about a single member LLC
The great advantage of a single member LLC is that you don’t have to file a separate tax return for your business.
Please don’t confuse this with the passthrough taxation that all LLCs–both single and multi-member–have. Regardless of the number of members in your LLC, if you elect to be taxed as a partnership, you avoid the double taxation of corporations.
However, as a multi-member LLC, your business must file a partnership tax return every year to report to the IRS how much income the partnership made (yes, I know that you’ve formed an LLC and not a partnership, but the IRS still insists on confusing everyone by calling it a “partnership” tax return). As a single member LLC, you don’t even have to file a partnership tax return.
As a multi-member LLC, you’d have to complete a partnership tax return each year. This is time consuming, and if you use a paid professional to do your taxes, expensive. With a single member LLC, all your income and expenses are recorded on Schedule C of your regular individual 1040 tax return. One return instead of 2 means lower accounting bills and less paperwork and confusion.
File a single member LLC
To take advantage of the ability to consolidate your LLC’s and personal income taxes on one return, you need to file what’s called a form 8832 Entity Classification Form. You can find a form 8832 at the IRS’s website. This form allows you to designate your single member LLC as a “disregarded entity”.
Though the term “disregarded entity” sounds vaguely like having your corporate veil pierced, it’s not the same thing at all. Filing your taxes as a disregarded entity makes no difference in the strength of your corporate veil. Instead, it merely tells the IRS not to expect a separate tax return from your LLC, and then instead all your business’s income and expenses will be recorded on your personal 1040.
This is the same way that sole proprietors report their business income.