What Is an LLC Proprietorship?

By Joseph Nicholson

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.

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.

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.

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Sole Proprietorship

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.

Limited Liability

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.

Self-Employment

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.

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How to Report Income as an LLC Member

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Can I Open an LLC in California as a Sole Proprietor?

In California, you can operate your business either as a sole proprietorship or as a limited liability company, but never both. A sole proprietorship is essentially a business entity owned by one person in which there is no legal distinction between the owner and the business. The owner receives all the profits and is responsible for all debts and losses. An LLC is an unincorporated association and offers limited liability to its owner, in that the owner is protected from individual liability. If you operate a small business, it’s unlikely that your choice will affect your daily operations. But before you decide on whether to open an LLC in California or not, you should consider the two key differences between sole proprietorships and LLCs: liability and taxes.

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When starting a business, there are many different factors to take into account. One of the principal concerns is that each class of business comes with different liabilities and tax requirements. Knowing the tax differences between an LLC and a sole proprietorship in your state will allow you to decide which type of business best suits your needs and circumstances.

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