Small business owners have a variety of withdrawal methods available
to them when attempting to minimize the amount of vulnerable assets
within the business. Taking payments for loans and leases is one
possible strategy that can accomplish this goal, subject to certain
tax issues.

For the corporation, withdrawing funds as payments for loans and
leases offers significant advantages and should ordinarily be a
first-line choice for withdrawing funds. Generally, self-employment
tax is avoided because the entity is not usually in the business of
making loans and leases, so any funds from these transactions are not
considered self-employment income.

Do these same advantages apply in the case of a one-member limited
liability company (LLC)?

While, essentially, the tax treatment of a one-owner LLC and a
multi-owner LLC is identical, the tax classification in each situation
is somewhat different. For tax purposes, a multi-owner LLC is
classified like a partnership.  Thus, the multi-owner LLC files an
information return with the IRS, which reports the LLC's income and
the allocation of this income to the individual owners. The owners
then report their share of the income on their personal income tax
returns.

The multi-owner LLC should enjoy the same exact self-employment tax
advantage with respect to payments for loans and leases that owners of
a corporation enjoy. Thus, the payments should not be subject to the
self-employment tax if the recipients are not in the regular business
of extending loans or leasing property. In this case, owners would pay
self-employment tax only on their share of LLC earnings, plus payments
received for salary.

In the case of the one-owner LLC, the situation is somewhat less
clear, because the one-owner LLC, technically, is classified as a
"disregarded entity" for tax purposes, similar to a sole
proprietorship.  Because the entity technically does not exist for tax
purposes, it files no form at all with the IRS. The owner simply
reports the LLC's income on his personal income tax return. This
greatly simplifies the payment of income taxes and is consistent with
the theme of simplicity that applies to LLCs.

However, this also means that payments by the LLC to the owner for
loans and leases will not be recognized on the tax return, because for
tax purposes the entity and the owner are one in the same. Due to this
fact, these payments may not escape the self-employment tax.  What do
you think?  Has there been any private letter rulings on this?  Can I
request one?  How?