Sole proprietors and single member LLCs (SMLLCs) are the two most common entities by which single member businesses file federal and state taxes. Both pay personal income tax on business profits, file a Schedule C, and pay self employment tax on their bottom-line profits.

However, SMLLCs offer owners a few important benefits that sole proprietorship does not.

1. Tax Planning and Key Benefits OF SMLLC

Compared to the other typical ways for individual owners to do business (as corporations or as sole proprietors), the SMLLC offers key advantages in terms of lower expenses and protection from lawsuits.

While state laws differ, entrepreneurs who choose the SMLLC structure will notice several ways in which this particular kind of entity is different from a standard sole proprietorship:

• SMLLCs are "pass through" entities, in which owners pay tax on distributions on their personal income tax returns.
• Most states do not impose a business tax on SMLLCs, nor is there any federal tax imposed at the business level.
• The informal structure does not require boards of directors, shareholders, or meeting minutes.
• You can file in any state, even one other than where you do most of your business.
• The LLC form protects your personal assets from debts, tax liens, and other financial obligations ( these are the main advantages SMLLCs have over sole proprietorships).
• It's simple to file the initial formation paperwork in the state of your choice and the fees for doing so are quite low.
• SMLLC owners can hire family members and friends for short-term jobs and deduct the expense directly from business profits.

However, the only way SMLLC owners can reap the tax benefits mentioned above is by staying on top of changing IRS regulations. So, while SMLLCs offer owners a simple, low-cost way of doing business, tax planning for this entity requires owners to be aware of where every dollar goes each day of the year.