Tax Advantages of a Single Owner LLC Business Entity

By Jennifer Kiesewetter, J.D.

Tax Advantages of a Single Owner LLC Business Entity

By Jennifer Kiesewetter, J.D.

A limited liability company (LLC) is a type of business structure that forms under state law. Though each state has its own LLC laws, the Internal Revenue Service (IRS) does not have an LLC taxation category and allows an LLC owner to choose the LLC's taxation election. Under rules established by the IRS, if an LLC only has one owner, also known as a member, then the LLC can elect to be taxed as either a disregarded entity or a corporation.

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Benefits of Being Taxed as a Sole Proprietorship

The LLC formation, which is different from its taxation, separates the member from certain business debts or lawsuits, creating a separate entity and giving the member personal liability protection. Choosing the disregarded entity tax designation means that the LLC does not pay taxes on its profits and losses as a business entity, but they instead pass through to the member's individual taxes.

Running a single-member LLC as a disregarded entity allows for minimal tax filing costs. Since the LLC isn't treated separately from the member for tax purposes, the member avoids the double taxation, which corporations face, of paying taxes on the LLC's income and expenses on both business and personal tax returns.

Benefits of Being Taxed as a Corporation

A single-member LLC can elect to be taxed as either an S corporation or a C corporation if you meet specific requirements. Being taxed on your individual tax returns often yields a high tax rate, but corporations are typically taxed at lower rates. Further, LLC members can avoid paying self-employment taxes if they're paid through a corporation as opposed to a disregarded entity. Thus, for many self-employed individuals, being taxed as a corporation creates significant tax benefits.

S corporation taxation, in particular, creates many benefits for a single-member LLC. For example, LLC members still enjoy pass-through income as they do with a disregarded entity. The income received from an LLC taxed as an S corporation is reported on the member's tax return, thus escaping double taxation. But, under an S corporation election, the member is not considered a self-employed individual. Because you are considered an employee receiving a reasonable salary, your payroll withholds taxes and federal self-employment tax.

C corporation taxation also provides benefits for a single-member LLC. For example, you are considered an owner in addition to an employee. As such, you treat your compensation as wages by filing a Wage and Tax Statement (Form W-2) and you can deduct for more expenses than if you had an S corporation.

Choosing Your Path

As a single-member LLC, you want to plan your taxation carefully. Whether taxation as a sole proprietor or a corporation is best can depend on your business, your industry, and your goals.

Consulting with an online service provider or an attorney to sift through your options is prudent. By seeking professional assistance from a business attorney or service provider, you can save time in the long run by choosing the right taxable election for your LLC.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.