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Single Member Limited Liability Companies

An LLC is a new entity created by state statute. The IRS did not create a new tax classification for the LLC when it was created by the states; instead IRS uses the tax entity classifications it has always had for business taxpayers: corporation, partnership, or sole proprietor. An LLC is always classified by federal law as one of these types of taxable entities.

A multi-member LLC can be either a partnership or a corporation, including an S corporation. To be treated as a corporation, an LLC has to file Form 8832, Entity Classification Election (PDF), and elect to be taxed as a corporation. A multi-member LLC that does not so elect will be classified by federal law as a partnership. A single member LLC (SMLLC) can be either a corporation or a single member “disregarded entity”. Again, to be treated by federal law as a corporation, the SMLLC has to file Form 8832 and elect to be classified as a corporation. An SMLLC that does not elect to be a corporation will be classified by the existing federal guidance as a Disregarded Entity which is taxed as a sole proprietor for income taxes.

The confusion in this area arises when determining employment tax requirements for an SMLLC that is a disregarded entity. Notice 99-6 gives the SMLLC classified as a “disregarded entity” two options for reporting and paying employment taxes:

Using the name and EIN assigned to the LLC, or
Using the name and EIN of the single member owner
Even if the employment tax obligations are reported using the SMLLC's name and employer identification number (EIN), the single member owner retains ultimate responsibility for collecting, reporting and paying over the employment taxes.

An LLC applies for an EIN by filing Form SS-4, Application for Employer Identification Number, and completing lines 8 a, b, and c. An SMLLC that is a disregarded entity and does not have or will not have employees does not need an EIN. It should use the name and TIN of the single member owner for federal tax purposes. However, if a SMLLC, whose taxable income and loss will be reported by the single member owner, nevertheless needs an EIN to open a bank account or if state tax law requires the SMLLC to have a federal EIN, then the SMLLC can apply for and obtain an EIN. If the SMLLC has no employees, it will not use this EIN for any federal tax reporting purpose.

If an SMLLC has or intends to have employees, the EIN rules are different. If there is or will be employment tax reporting, both the single member owner and the SMLLC will need an EIN (two EIN's). If the SMLLC has already received an EIN for reasons set out in the above paragraph, then only the owner will need to file the SS-4 and be assigned an EIN.

These numbers should not be used interchangeably. Doing so will result in complicated problems which could require the taxpayer's, practitioner's, and IRS's resources to correct.

There are also instructions contained in Notice 99-6 which limit changing back and forth between reporting under the SMLLC or the single member owner's EINs. Be sure to review this notice and its limitations before making a change.

Recent Changes
In August 2007, final regulations (T.D. 9356) were issued requiring single member LLCs (SMLLCs) to be treated as the taxpayer for employment tax and excise tax obligations. The SMLLC will continue to be disregarded for other federal tax purposes. This change will begin for excise taxes that accrue after January 1, 2008, and for employment taxes that accrue after January 1, 2009.

After January 1, 2009, Notice 99-6 is obsolete and the SMLLC will be responsible for collecting, reporting and paying over employment tax obligations using the name and EIN assigned to the LLC.

Filing Federal Tax Forms If the LLC is a sole proprietor for federal tax purposes, the entity should file either:

Form 1040 Schedule C, Profit or Loss from Business (Sole Proprietorship)
Form 1040 Schedule E, Supplemental Income or Loss
Form 1040 Schedule F, Profit or Loss from Farming
Form 1040 Schedule J, Income Averaging for Farmers and Fisherman

If the business has net income over $400, it may be required to file Schedule SE, Self-Employment Tax.

Source: Chuck Christiansen, SCORE Counselor August 2010

The material in this publication is based on work supported by the U.S. Small Business Administration under cooperative agreement SBAHG-04-S-0001. Any opinions, findings and conclusions or recommendations expressed in this publication are those of the author and do not necessarily reflect the views of the U.S. Small Business Administration. The information contained in this publication is believed to be accurate and authoritative but is not intended to be relied on as legal, accounting, tax or other professional advice. You should consult with a qualified professional advisor to discuss issues unique to your business.

Copyright 1990. SBA retains an irrevocable, worldwide, nonexclusive,
royalty-free, unlimited license to use this copyrighted material.