A proprietorship is a type of business structure in which the owner of the business and the business itself are the same legal entity. Limited liability companies, or LLCs, have great flexibility under state and federal law as to how they are organized and operated. One option for an LLC is to be taxed as a proprietorship.
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Entity Classification and Election
The IRS has default rules for how an LLC is taxed. An LLC with just one member is automatically treated as a sole proprietorship. An LLC with more than one member is automatically taxed as a partnership. Both of these business types are disregarded entities, meaning the income or loss of the business flows to the individual returns of the owners. Either type of LLC, however, can file Form 8832 and elect to be taxed as a corporation.
If you have a single-member LLC, your company is most likely to be taxed as a sole proprietorship. This means your individual Form 1040 will reflect the profit or loss of the business, and you will have to complete and attach Schedule C. The business itself is responsible for employment taxes, though, and must have both a bank account and EIN in its name.
While a true sole proprietorship provides its owner with no protection from the liabilities of the business, an LLC is able to do so under state law. So, even though your business is taxed as a sole proprietorship at the federal level, you still enjoy protection from liability for the company's debts and obligations that a true sole proprietor lacks. In other words, treatment of your LLC as a sole proprietorship by the IRS does not render your business into an actual sole proprietorship.
The extent of the similarity between an LLC and a sole proprietorship is in the way it's treated by the IRS. This means the owner of a single-member LLC being taxed as a sole proprietorship must pay self-employment tax. The obligation is triggered if you net more than $400 in a given tax year from your business. As of December 2010, the 15.3 percent tax rate covers the Medicare and Social Security taxes that would normally be withheld by an employer.
References & Resources
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