Can someone explain to me how single member LLCs work as far as tax purposes. Will I be taxed as a sole proprietor, or will I have the advantage of being taxed at a lower percentage like an S-corp? Or, will it depend on the tax bracket I’m currently in with my full time job plus earnings from the LLC? Any knowledge on this will be great… Thanks
single member LLC’s are taxed either as a sole proprietorship (disregarded as a seperate entity for tax purposes) on Schedule C of your 1040 or as a corporation. If you choose corporate taxation, you can further request to be considered an S-Corp.
Note that this only affects your taxation, it has no effect on the liability protection your LLC provides.
Mark Wagner, CPA
Would it still be disregarded as a separate entity for tax purposes if I checked “Partnership” as the type of entity on Form SS-4 Number 8a? Also, would it be to my advantage to elect being an S-corp versus being a disregarded entity during tax time? Because usually sole proprietorships are taxed pretty high, right??
a single member LLC cannot elect partnership tax status. technically a partnership with one partner cannot exist.
however, to answer your question, the SS4 is not the form where you make your tax election. If you did not file a form 8832 specifying otherwise, you will be taxed as a disregarded entity on your 1040 (by default).
A C-Corp will have a lower tax rate, but any distributions from income will be further taxed at the personal level (the infamous “double taxation” problem). Income from an S-Corp is taxed at the personal level and rates, so there is no difference between this and a sole proprietorship.
From a tax perspective, the S-Corp only has one significant advantage and that’s a mechanism to reduce self-employment taxes somewhat by paying your self a reasonable salary and taking additional monies out of the company in a distribution. Unless your making LOTS of money, this is never really an issue.
Plus, corporate taxation creates an extra tax return and some additional paperwork hassles. And once you make the election to be taxed as a corp, it requires IRS approval to go back.
I would recommend that you stay with the disregarded entity unless there are some other issues that I’m not aware of.
Mark Wagner, CPA
Wow!!! Thanks Mark!! That clears up a lot of things for me. Well, I don’t think I have anymore questions about this. I appreciate the info…
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