As a single member LLC your entity is considered a “disregarded entity” for federal tax purposes. This means that while you have the limited liability protection afforded an LLC, you are taxed the same as if you were a sole proprietor in that all of the profits and losses flow down directly to you as an owner.

One potential downside to this structure is paying the self-employment tax on the profits generated by the LLC. However, as the owner of a single member LLC you do have the option of making an S corporation tax election for your entity. Like a single member, or multi-member LLC, an S corporation is considered a pass-through taxation structure.

By making an S corporation election the owner can now make themselves an employee of the entity, pay his/herself a reasonable salary (and take note that the IRS is serious that the salary must be reasonable), and take any other profits left over as a distribution. The distributions from an S corporation do not carry with it any employment related taxes, while in comparison all profits in the standard single member LLC setup carry with its self-employment taxes.

To elect S corporation tax status, you must file IRS form 2553. There are limitations for when the election can be made as it must be filed with 75 days of forming the company, or by March 15th to ensure it applies to the current year.

Aspects such as what you must set as a reasonable salary, when the s corporation election will apply, and the added administrative paperwork make filing the S corporation election a decision that requires research and thoughtfulness. Simply making the election to avoid self-employment taxes can be an endeavor you’ll later regret as it does not make sense for all single member LLC owners.

December 6, 2019 2:42 pm