Can an LLC Be an Individual or Sole Proprietor?

By Elizabeth Rayne

A limited liability company is a common business structure which combines the limited liability of a corporation with the flexibility of a partnership. State law regulates the formation and management of LLCs. A single-member LLC may function similarly to a sole proprietorship in terms of management and taxation; however, the owner is usually not personally liable for the debts and obligations of the business.

A limited liability company is a common business structure which combines the limited liability of a corporation with the flexibility of a partnership. State law regulates the formation and management of LLCs. A single-member LLC may function similarly to a sole proprietorship in terms of management and taxation; however, the owner is usually not personally liable for the debts and obligations of the business.

State Regulation

Every state has an LLC statute which sets forth how an LLC may be formed. As the sole owner of an LLC, you may hire employees or independent contractors to help run the business. However, you will be solely responsible for managing the business. The LLC provides limited liability for the owner, who is not personally liable for the debts and obligations of the business.

Ready to start your LLC? Start an LLC Online Now

Federal Tax

The IRS does not recognize LLCs as a business entity, but instead requires owners to choose how they want to be taxed. A single-member LLC can choose to be taxed as a sole proprietorship or a corporation. As a sole proprietor, the IRS recommends you report the income from the LLC on Schedule C of your 1040. You may be required to pay self-employment tax. However, a sole proprietorship is a disregarded entity, meaning that business owners do not pay corporate income tax before paying personal income tax. Conversely, if you report your income as a corporation, you will pay corporate tax in addition to personal income tax.

Effects of IRS Classification

Choosing a non-LLC tax format does not change the legal nature of an LLC. If you choose to be taxed as a sole proprietorship, this does not change the fact that you own an LLC or change the business type into a sole proprietorship. You would still enjoy limited liability and the same management structure, even if you choose a different entity for taxation purposes.

Single-Member LLC Precaution

Independently-owned LLCs should be aware that if they do not take adequate precautions, they may be liable for the debts of the business. In some cases, when a single-member LLC does not adequately capitalize a business or mixes personal assets with the assets of the LLC, a court will treat the business as a sole proprietorship and strip the owner of limited liability protection. A company is adequately capitalized when it has enough money and assets to independently function as a business. As such, owners of single-member LLCs may want to take extra steps to ensure their business has enough capital to function independently and they adequately maintain a separate and distinct identity from the business.

Ready to start your LLC? Start an LLC Online Now
Going From Multi Member LLC to Single Member LLC

References

Related articles

Taxes on Corporations Compared to Partnerships

Corporations and partnerships are both business entities, or ways of organizing a business structure. A corporation is an independent entity, while a partnership operates under the auspices of its partners. Corporations and partnerships are subject to different taxation schemes, but some types of corporations can reap the advantages of partnership-type taxation while maintaining their status as an independent legal entity.

How to Become an LLC Business

The choice of business structure is one of the first and most important business decisions a new owner can make, but the decision is not set in stone. If you are running an existing business as a sole proprietor, partnership or corporation, you may choose to convert the business into a limited liability company. An LLC is a hybrid business structure, providing the limited liability features of a corporation while maintaining the ease and flexible management style of a sole proprietorship or partnership.

Deducting a Salary for a Single-Owner LLC

Creating a limited liability company for your business instead of operating it as a sole proprietor affects your ability to deduct the salary you pay yourself on a federal tax return. As the single owner of the LLC, which the IRS refers to as a single-member LLC, you can choose to subject your business earnings to corporate or sole-proprietorship taxation. However, you can always deduct the salaries you pay to employees under both forms of taxation.

LLCs, Corporations, Patents, Attorney Help

Related articles

Tax Advantages of a Single Owner LLC Business Entity

A limited liability company, or LLC, is a form of business structure authorized by state law. An LLC is not a business ...

How to Run an Online Business Without Incorporating

There are several ways to organize a business other than incorporating. Depending on the nature of your online ...

Why Open an LLC?

An LLC, or limited liability company, offers distinct advantages over other more traditional forms of doing business. ...

Regulations for a Single-Member LLC in Virginia

For an individual starting a business in Virginia, it is important to understand the regulations concerning limited ...

Browse by category