What You Should Know About Filing Tax Returns As A Single Member LLC

You’ve decided to chase your dreams by starting a new company and working for yourself, congratulations!

You likely formed a Single Member Limited Liability Company (LLC) because you are the only member (owner) and wanted things to be simple. An LLC is a very simple way to start a business, with few legal requirements on an on-going basis. It works quite well for many people; that’s why it is so popular. But, what about the tax ramifications? Unfortunately those are not always so simple.

An LLC is an entity created by state statute and is not recognized by the Internal Revenue Service (IRS) as a tax filing entity. As a result, you must make an election (form 8832) to be treated as filing under a different classification: corporation, partnership, sole-proprietor, etc. If you don’t make another election, the IRS will recognize you as what’s called a “Disregarded Entity” and you will be classified as a sole-proprietor, meaning you will have to pay self-employment (social security) taxes on all your bottom-line profits. Not only will you have to pay the employees’ portion but, since you own the company, the employer’s share as well. The total will be 15.3% of your net income. That’s a lot of money and doesn’t even include the income tax you’ll owe.

Even if you have a partner and won’t be treated as a disregarded entity, the default is a partnership and the same self-employment tax issues will exist. That may or may not work out best for you and/or your partner.

So what is the best filing method? The answer is that is depends on your situation. It’s best to speak with a CPA to ensure you’re making the best decision for you and your business. Tax professionals like me can help save clients thousands of dollars by making the best filing status and avoiding some of that tax burden.

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