Watch Out For This Single Member LLC Trap


This post is in: Business
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Hands down, the most popular entity structure these days is the Limited Liability Company (LLC). There are a couple of reasons why it’s so popular:

(1)They are tax chameleons. An LLC can elect how it wants to be taxed.

(2)They provide better asset protection since they protect both you from actions of the business and the business from your personal judgements.

What happens if you don’t elect how your LLC will be taxed? In that case, the IRS has a default tax program that they give you.

Since there is no such thing as an LLC tax return, the default is something that you need to know.

If you have a business and there is one owner, it is taxed as a Sole Proprietorship, Schedule C. If you have a business and there is more than one owner, it is taxed as a partnership.

If you have passive income and have the default tax treatment, you report on Schedule E if you have a single member LLC. If you have more than one owner, then it is taxed as a partnership.

What if you and your spouse own the LLC together? This is where it gets tricky. If you live in one of the community property states such as Arizona, California, Idaho, Nevada, New Mexico, Texas and Washington, then your ownership in the single member LLC will be treated as one member. If you live in a state that is not community property, than you actually have a multi-member LLC.

If you wish to avoid filing with a partnership return and you live in a non-community state, then the best bet is to have just you or your spouse own the LLC. Don’t both own it.

Got questions on structures?  Get in on one of our coaching sessions where we answer your questions and go over the intricacies of business structures as well as other business building and tax saving strategies.  https://www.ustaxaid.com/coaching/



3 Comments

  1. Diane Kennedy says:

    Thank you for taking the time to write such a nice comment.

  2. Will says:

    Diane,

    Thanks for your world class advice, much of which you’ve even made available for free.

    Back in 2006 I was looking for direction about what business entity/structure I should use for my small business, and I still remember an email I received from you that sold me on a single member LLC taxed as an S corporation. (I understand this strategy may or may not apply today.)

    That was about seven years ago, and I’ve been delighted with your advice and have profited from it since. Thank you, Diane!

  3. Thanks Diane for the good info. I have a single member llc here in NJ. I appreciate your good (up to date) advice.

    (seen this on FB- we’re friends)

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