Handbook / Business structure

Single-member LLC: how it is taxed and what changes for you

Most self-employed people who form an LLC are its only owner. A single-member LLC is simple to run, but it sits in an unusual spot: separate from you under state law, yet ignored by default for federal income tax. Understanding that split explains most of the practical rules.

Two views of the same business

Under state law, the LLC is a separate legal entity. It can sign contracts, own property and hold a bank account, and it can limit your personal liability for business debts.

For federal income tax, the IRS treats a single-member LLC as a "disregarded entity" unless it elects otherwise. Its activities are reported on the owner's return. For an individual owner, that usually means Schedule C, with self-employment tax calculated on Schedule SE, exactly like a sole proprietor.

For employment and certain excise taxes, the IRS treats the LLC as a separate entity again. If you hire employees, the LLC uses its own EIN for payroll.

Getting an EIN

The IRS notes that most new single-member LLCs classified as disregarded entities will need to obtain an EIN, and that an LLC needs one if it has employees or files certain excise tax forms. Banks often ask for one when you open a business account. Apply free on IRS.gov using Form SS-4's online version.

For income tax reporting, though, a disregarded LLC owned by an individual generally uses the owner's TIN. When a client asks you for a Form W-9, the IRS says to provide your SSN or your own EIN as owner, not the LLC's EIN. Many people get this wrong.

Setting it up

The state-level steps vary but usually include:

1. choosing a name that meets state rules
2. filing articles of organization with the state
3. naming a registered agent
4. writing an operating agreement, even if not required
5. getting any local licenses

The guide on how to form an LLC walks through each step. Most states also require an annual or biennial report and fee; missing it can lead to the LLC losing good standing.

Keeping liability protection meaningful

The SBA notes that an LLC can protect personal assets from business liabilities. That protection depends on treating the LLC as a real, separate business:

• use a separate business bank account
• sign contracts as the LLC, for example "Name, LLC, by Your Name, Member"
• put the LLC's name on invoices, website and quotes
• do not pay personal bills from the business account
• keep the state filings current
• keep adequate insurance

An LLC does not shield you from liability for your own professional mistakes or debts you personally guarantee. Insurance covers risks the entity cannot.

Paying yourself

As a disregarded entity, you do not take a salary. You transfer money from the business account to your personal account as an owner draw. Draws are not deductible expenses; you are taxed on the LLC's profit whether you withdraw it or not. Set money aside for income and self-employment tax and pay estimated tax as needed.

Elections that change the tax picture

A single-member LLC can elect to be taxed as a corporation by filing Form 8832, and an eligible LLC can elect S corporation status with Form 2553 without filing Form 8832 separately. An S election changes how you pay yourself and adds payroll and a separate return. It suits some profitable businesses but not all. The guide on the S corp election explains the trade-offs.

Single-member LLC or sole proprietorship?

For tax, the default result is the same. The difference is legal separation, cost and paperwork. The comparison in LLC vs sole proprietorship helps decide.

If you add a member

An LLC with two or more members is taxed by default as a partnership, which means a separate partnership return and K-1s. Adding a member is a real change; plan it with professional advice.

A single-member LLC is separate under state law, disregarded for income tax by default, and separate again for payroll. Keep it genuinely separate, file state reports, and review elections only when the numbers justify them.