Limited liability companies (“LLC’s”) have become a popular business entity, providing liability protection to its members, nearly identical to that of a corporation, while at the same time providing more flexibility and less formality than typically exists in the corporate form.
One thing that many LLC owners are not aware of is that, for tax purposes, the IRS default is to treat multi-member LLC’s as a partnership. However, if the LLC has only a single member there is no partner, and therefore no partnership. In such cases the IRS treats the LLC as a “disregarded entity” and the income from the LLC is treated as self employment income and is reported on the members personal tax return as such. Being treated as a disregarded entity can create negative income tax implication because self employment income is subject to self employment tax in addition to income tax.
As an alternative, the LLC can elect to be taxed as a corporation. The advantage of electing corporate tax treatment is that the LLC can pay it’s member a reasonable wage. The wage is subject to the equivalent of self employment tax, but any remaining profits would not be considered self-employment income, and therefore not be subject to self employment tax.
An LLC can elect corporate tax treatment by filing IRS From 8832. If you desire to be treated as an S Corporation, you will also need to timely file IRS Form 2553. If you own a single member LLC, talk to your legal counsel to determine if electing corporate tax treatment is appropriate in your circumstances.