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.

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.

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.

Ready to start your LLC? Start an LLC Online Now

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
Can a Business Own Part of an LLC?


Related articles

Difference Between Incorporation & LLC for a Non-Profit

While nonprofits are traditionally organized as corporations, they can also be formed as limited liability companies in some states. There are benefits and drawbacks to each option. Because nonprofits are formed under state law and often apply for federal tax-exempt status with the Internal Revenue Service, it is important to understand that not all states allow nonprofits to operate as LLCs. Internal management flexibility is generally what makes this type of structure more appealing than a corporation.

Can I Change an LLC From Members to Managers?

A limited liability company is an independent legal entity formed under your state’s laws. If you choose to organize your business as an LLC, you must also decide whether your LLC should be managed by its members or by non-member managers. While it can be a hassle to alter this decision later, you can change your management structure after you start your business.

Can More Than One Business Be Conducted Under One LLC?

A limited liability company, or LLC, is a common and flexible legal structure that is formed under state law. Like a corporation, the owners of an LLC are not personally liable for the debts of the business. Unlike corporations, however, LLCs do not pay corporate income tax and don't have shareholders or a board of directors. Owners of an LLC have the option to set up the business in any way that suits their purpose, which includes the option to create subsidiary companies under the LLC.

LLCs, Corporations, Patents, Attorney Help LLCs

Related articles

General Partnership Vs. LLC

Choosing a proper business structure is one of the crucial steps encountered by owners in the initial stages of ...

Advantages & Disadvantages of a Single-Member LLC

An LLC enjoys the limited liability of a corporation, and the potential tax benefits of a disregarded entity. State law ...

Can I Have a Partner With an LLC?

A Limited Liability Company is a common business entity that may be owned and managed by one or more individuals. LLCs, ...

Incorporating Vs. LLC

One of the most important initial decisions in starting a business involves deciding what type of business entity your ...

Browse by category
Ready to Begin? GET STARTED