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Q: Single-member LLC tax filing ( Answered 4 out of 5 stars,   0 Comments )
Subject: Single-member LLC tax filing
Category: Business and Money > Small Businesses
Asked by: vorpaljon-ga
List Price: $50.00
Posted: 08 Jun 2006 12:53 PDT
Expires: 08 Jul 2006 12:53 PDT
Question ID: 736478
Should my single-member Utah LLC file taxes as a corporation or sole

The Utah agency in charge of filing as an LLC wants to know before I
start whether I will be filing taxes as a sole proprietorship or
corporation.  From my research, I can tell that I could do either, but
not what makes the most sense for my business.

I'm a stay-at-home dad, married to an attorney, and will be starting
an LLC to do a couple of web projects and some web contract
programming.  I don't expect to turn a profit for a year or more.  I
expect to earn $4k-$10k this year doing contract programming.  Most of
the income will be applied towards childcare, equipment, building a
home office, marketing, and paying contractors for art/content
development on my own stuff.
Subject: Re: Single-member LLC tax filing
Answered By: hummer-ga on 08 Jun 2006 19:16 PDT
Rated:4 out of 5 stars
Hi vorpaljon,

Your question centers around the IRS and how you want the income from
the company treated. By default, the IRS will treat the company as a
Sole Proprietorship unless you elect to make it a Corporation. This
means that either 1) your corporation will have to report business
income and expenses and you will also report personal gains from the
company, or 2) you will be taxed as the Sole Proprietor and your
company will be ignored. Given these two options, and given the
information that you've posted, I would say that the second option
would be better for now (so much depends on your financial situation
and you really need to ask your accountant if you have any doubts). A
sole proprietorship avoids the possibility that you'll pay taxes on
income twice, once at the corporate level, and then again at the
personal level.

Single member LLCs.
"Generally, when an, LLC has only one member, the fact that it is an
LLC is ignored or ?disregarded? for the purpose of filing a federal
tax return. Treasury Regulations Section 301.7701-1,-2,-3"
"If you prefer to file as a corporation instead of as a ?disregarded
entity? Form 8832 must be submitted."

FORM 8832: Entity Classification Election:
"...a business entity with a single member can choose to be classified
as either an association taxable as a corporation or disregarded as an
entity separate from its owner."
Disregarded entity:
"A disregarded entity is an eligible entity that is treated as an
entity that is not separate from its single owner. Its separate
existence will be ignored for Federal tax purposes unless it elects
corporate tax treatment."

For IRS purposes, how do I classify a limited liability company? Is it
a sole proprietorship, partnership or a corporation?
"A limited liability company (LLC) is an entity formed under state law
by filing articles of organization as an LLC. Unlike a partnership,
none of the members of an LLC are personally liable for its debts. An
LLC may be classified for Federal income tax purposes as if it were a
sole proprietorship (referred to as an entity to be disregarded as
separate from its owner), a partnership or a corporation. If the LLC
has only one owner, it will automatically be treated as if it were a
sole proprietorship (referred to as an entity to be disregarded as
separate from its owner), unless an election is made to be treated as
a corporation...If a taxpayer does not file Form 8832 (PDF), a default
classification will apply."

"So, is being a sole proprietor the right business structure for you?
For most home business, in the beginning, yes.
If you choose to start your business as a sole proprietor, you do have
the option of incorporating as your business grows."

However, there is a third option which I think you should consider
even though you haven't asked about it.  You have to ask yourself why
you are forming an LLC in the first place. You don't really need one
in order to be the sole proprietor of your web business and you don't
need one to claim business expenses. The main reasons for forming an
LLC is for protection from lawsuits or debts and it doesn't sound to
me as though your business should be too worried about either. For
now, consider just starting up your home business as the sole
proprietor (without LLC status) and you could always switch to an LLC
sometime down the road if you really needed to.

The Basics of Sole Proprietorships
"Chances are, you're already running a sole proprietorship. Now,
educate yourself on the pros and cons, the tax implications, and the
legal liabilities to determine if you want to remain a sole
Disadvantages of a Sole Proprietorship
# "Owners are subject to unlimited personal liability for the debts,
losses and liabilities of the business.
# Owners cannot raise capital by selling an interest in the business.
# Sole proprietorships rarely survive the death or incapacity of their
owners and so do not retain value.
Forming a Sole Proprietorship
You may already be operating a sole proprietorship. One of the great
features of a sole proprietorship is the simplicity of formation.
Little more than buying and selling goods or services is needed. In
fact, no formal filing or event is required to form a sole
proprietorship; it is a status that arises automatically from one's
business activity.",4621,321392,00.html

"If you operate as a sole proprietorship, you and your business are
legally inseparable.
The simplest form of business entity is the sole proprietorship. If
you choose this legal structure, then legally speaking, you and the
business are the same. You can continue operating as a sole proprietor
as long as you're the only owner of the business."
"From an income tax standpoint, a sole proprietorship and its owner
are treated as a single entity. Business income and business losses
are reported on your own federal tax return (Form 1040, Schedule C).
If you have a business loss, you may be able to use it to offset
income that you receive from other sources."
Personal Liability
A potential disadvantage of doing business as a sole proprietor is
that you have unlimited personal liability."

Can I convert my existing business to an LLC?
"Yes. Converting a sole proprietorship or a partnership to an LLC is
an easy way for sole proprietors and partners to protect their
personal assets without changing the way their business income is

Do independent contractors need business licenses?

Who should form an LLC?
"You should consider forming an LLC if you are concerned about
personal exposure to lawsuits or debts arising from your business. For
example, if you decide to open a store-front business that deals
directly with the public, you may worry that your commercial liability
insurance won't fully protect your personal assets from potential
slip-and-fall lawsuits or claims by your suppliers for unpaid bills.
Running your business as an LLC may help you sleep better, because it
instantly gives you personal protection against these and other
potential claims against your business."

Limited Liability Company FAQ
Answers to common questions about starting and running an LLC.

Sole Proprietorship and Partnership
"A lot of small mom-and-pop shops never actually form a legal entity.
By default, these become sole proprietorships (if only one person is
involved) or partnerships (if more than one person is involved.) You
don?t have to do anything to become a sole proprietor?you already are
one if you?re performing a service or selling a product for money, but
haven?t formed another legal entity through which to do business. The
same is true of a partnership?if two or more people are engaged in a
business they have a partnership, whether or not there is a formal
partnership agreement in place."
Advantages of a Sole Proprietorship or Partnership
    * Less Paperwork. 
    * Tax shelter for your startup costs. 
    * Easy to close up shop. 
    * Keep your options open. 
Disadvantages of Sole Proprietorships and Partnerships
    * No protection of company name. 
    * Liability. OK, this is the big one. 
    * Higher Taxes. 
    * More difficult to finance. 
    * Credibility. 
"If you?re planning to hire employees, incur debt, take on any
external financing, borrow money, or grow into a larger business,
incorporation or the formation of an LLC is usually the best
Advantages of Corporations and LLCs
    * Limited Liability. 
    * Tax benefits. 
    * Growth and tax planning. 
    * Credibility.  
Disadvantages of Corporations and LLCs
    * More Paperwork. 
    * Cost.

LLC Basics
"This hybrid entity brings together some of the best features of
partnerships and corporations, and is a great choice for entrepreneurs
who want to move beyond the sole proprietorship.
More Pros and Cons
Here are more advantages of the LLC form of business organization:
# An LLC allows for an unlimited number of members; however, if the
LLC has just one owner, it will be taxed as a sole proprietorship.
# The LLC allows for the "special allocation" of profits--the
disproportionate splitting of member profits and losses (in different
percentages than their respective percentages of ownership). This
means that members can enjoy the benefits of receiving profits (and
writing off losses) in excess of their individual ownership
# The members enjoy limited liability, which means they are personally
protected from any liability of the LLC and successful judgments, as
well as from the LLC itself.
# Managing members' share of bottom-line profit is considered earned
income because the managing member is considered to be an active
owner--therefore qualifying the managing member for special "fringe
benefit" treatment.
# The members' share of the bottom-line profit of an LLC is not
considered earned income, and therefore is not subject to
self-employment tax.
# Members are compensated using either distributions of profit or
guaranteed payments. A distribution of profit allows each member to
pay themselves by merely writing checks--whenever they need the money
(provided the business has the available cash). Guaranteed payments
represent earned income to the members, thereby qualifying them to
enjoy the benefits of tax-favored fringe benefits.
# The managing member of an LLC can deduct 100 percent of the health
insurance premiums he or she pays--up to the extent of their pro-rata
share of the LLC's net profit, because the profit is considered earned
income. Note: If a member has earned income, he or she will also
# A corporation can be a member of an LLC. This allows you to create
an additional level of ownership, which is designed to create an
entity that can offer such traditional fringe benefits as retirement
plans and an additional level of protection from liability.
# As a member, you can contribute capital or other assets to the LLC,
or loan the LLC money to put dollars or value into the business. You
can take dollars out by taking a repayment of your loan (plus
interest), a distribution of profit or a guaranteed payment. If any of
the members die, the LLC can continue to exist--subject to the
unanimous positive vote on the part of all remaining members.
Some of the disadvantages of an LLC include:
# Each member's pro-rata share of profits represents taxable
income--whether or not a member's share of profits is distributed to
him or her.
# The managing member's share of the bottom-line profit of the LLC is
considered earned income, and therefore is subject to self-employment
# The members' share of bottom-line profit is not considered earned
income because the members are considered to be inactive owners;
therefore, the members do not qualify for special tax-favored "fringe
benefit" treatment.
# As a member of an LLC, you are not allowed to pay yourself wages.
# Some states do not allow the organization of LLCs for certain
professional vocations.
# For companies that wish to pursue venture capital, accumulate a
large number of shareholders, and/or eventually pursue an initial
public offering, the LLC is not an appropriate alternative to a

Chart: Ways to Organize Your Business
This chart lists the pros and cons of corporations, LLCs,
partnerships, sole proprietorships, and more.

If you still have questions about whether to elect Corporation for tax
purposes after you form your LLC, the best person to ask is your
accountant as he will know your financial history and plans.

I was glad to work on this for you, I hope I've been able to make it
clear for you. If you have any questions, please post a clarification
request and wait for me to respond before closing/rating my answer.

Thank you,

Google Search Terms Used: pros cons llc sole proprietorship irs
vorpaljon-ga rated this answer:4 out of 5 stars
The researcher found a little bit more than I had about the subject,
and included a good suggestion (reconsider forming the LLC).  My
question is probably unanswerable because it is too dependent on our
personal finances.  I was hoping to avoid visiting an accountant, but
it looks like I'll have to.

There are no comments at this time.

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