single member LLC tax stuff
A single member LLC can be taxed as a disregarded entity or as an S Corporation.
First and foremost, this is an area best discussed with your accountant, so please do not interpret this short post as me trying to take the place of your accountant–I am not. Ok, with that necessary clarification, let’s proceed.
I guess we should also define Single Member LLC. As the name indicates, this is an LLC that has only one owner. For legal and tax purposes, an owner of an LLC is most often referred to as a “member.”
Per the IRS:
“And an LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes), unless it files Form 8832 and affirmatively elects to be treated as a corporation.” (https://www.irs.gov/businesses/small-businesses-self-employed/single-member-limited-liability-companies)
Forget for a moment all other aspects of an LLC for a moment. We are dealing here only about how an LLC (a/k/a limited liability company) is viewed by the IRS for tax purposes. Unless you tell the IRS otherwise by filing Form 8832, the IRS will expect that your single member LLC is a disregarded entity, meaning that all profits and losses of the business flow directly to you as the owner. This also means that all income of the company is subject to self-employment tax.
You have now most likely realized why this is a discussion that you should have with your accountant. There are several factors that go into the determination of whether you and your business are wise to retain disregarded entity status with the IRS or whether it would be better for you to elect S Corp status for your company. If you were to choose the latter option, you might be able to avoid some self-employment taxes, as you would not then be required to pay such taxes on all of the income of the business. However, there are always strings attached with benefits from the IRS, right? In this case, electing S-Corp status comes with other requirements and restrictions attendant to the world of S-Corps.
To have your LLC be deemed and taxed as an S-Corp, you need to file IRS Form 2553 in a timely manner. What does that mean? Here is the explanation from the instructions of Form 2553:
Complete and file Form 2553:
No more than two months and 15 days after the beginning of the tax year the election is to take effect, or
At any time during the tax year preceding the tax year it is to take effect.
Rather than me trying to give my interpretation of what that means–here again, this is something best discussed with your trusted accountant. As with most things in the legal, accounting and tax world, this is NOT one-size-fits-all stuff. What makes sense for me and my single member LLC may not be the right answer for you and your company. Further, if you spend time online searching for articles and opinions from accountants, lawyers and others as to whether you should elect S-Corp status, you will find responses and answers which are all over the board. Part of this is due to the fact that just about everyone has an opinion these days (even if they are not qualified to opine on such things…:). But again, what is right for one person may not be correct for another person.
So I will end where I began, with a very strong exhortation that you do a little research, but then discuss your situation with your accountant and defer to his or her wisdom and expertise. This is most definitely a tax and accounting decision.