The issue of corporate taxation in the US varies according to different states and entities, hence the ongoing discussion about the taxation arrangements in various cases. In a single-member LLC, there is only one voting member, the owner. Business owners prefer an LLC structure because it offers them the easy tax filing of a sole proprietorship, but includes liability protection.
Single-member LLC owners can choose if they want to be taxed as a corporation, they can bring on additional members, and can pass on their membership to others.
Since single-member LLC owners are taxed like any other self-employed people. They submit personal tax returns to the IRS and list their self-employment tax amount, and pay a quarterly tax. Read more about LLC tax structures and how the IRS ignores the business structure in a single-member LLC.
The corporate veil and its importance
Liability protection, also known as the corporate veil, protects the business owner’s personal assets if the company is sued or can’t pay its debts. Only business assets can be seized to pay off any outstanding amounts (including federal taxes).
However, if an LLC owner mixes their personal and business assets, then the corporate veil is pierced. If it is compromised, a court may rule the liability protection has fallen away and the business owner can be held personally liable. Every LLC owner must be aware of this vulnerability.
An LLC must have a business bank account and a business credit card. All expenses for the business must be recorded, and the LLC should have a good accountant or accounting program for this purpose.
Single-member LLC Taxation
Single-member LLC companies are taxed according to their chosen LLC tax structure. If the company has not chosen to be taxed like a corporation, then it is considered a pass-through or disregarded entity by the IRS and it is taxed like a sole proprietorship.
The profits and losses “pass-through” the business and are reported on the personal tax returns of the member. Therefore, a single-member LLC does not pay federal income taxes.
LLC members pay themselves with a distribution. They pay self-employment tax on the distribution to the IRS, but not income tax because the money comes from the LLC’s profits, which the LLC owner has already been taxed on. Owners must record their distribution, but don’t pay payroll taxes on it.
If an LLC has had no business activity, the owner does not file an income on Schedule C unless they have other non-LLC self-employment income.
All LLCs, regardless of their chosen tax designation, must file federal taxes to the IRS. This is done by filling in Form 1040 and its various schedules.
A single-member owner needs to report their business income in Schedule C, their self-employment taxes in Schedule SE, and any other income from investments and rental properties in Schedule E.
There are various forms of state taxes depending on the state the business is in. These may include franchise tax, unemployment insurance tax, sales and use tax, withholding tax, or gross receipts tax. When any of these apply to an LLC, they are paid by the individual members because the LLC is a pass-through entity.
Choosing to be taxed as a corporation
A single-member LLC can also choose to be taxed as a C corporation or S corporation if any of these are appropriate for their business type.
C Corporations pay what is known as double-taxation. This means they pay taxes on their gross income from which all the operating expenses are deducted. Profits are distributed to shareholders, and they pay income tax on these.
S corporations are preferred by businesses with significant earnings because members avoid double taxation. The owner is considered an employee, paying tax on their set salary, but not on the remaining profits.
Understanding business expenses
LLC owners are often confused when it comes to which business expenses they can deduct from their taxes. According to the IRS, the expenses that can be deducted are those that are necessary for the success of a business. These include office supplies, business licenses and permits, business rentals, advertising, insurance, and general maintenance.
Some expenses are harder to deduct because they have spending limits and additional terms. These include entertainment and travel expenses.
Good bookkeeping practices and the advice of an accountant is invaluable to any LLC.
One of the biggest benefits of an LLC is it allows the owner to choose the most advantageous tax structure for their business. All LLCs have pass-through taxation by default unless they choose otherwise, and their profits and losses pass through and are reported on the owners’ tax returns.