Sole proprietors and single member LLCs (SMLLCs) are the two most common entities by which single member businesses file federal and state taxes. Both are assessed income tax on business profits at personal marginal tax levels, typically file a Schedule C or E on the Form 1040, and may pay self employment taxes on their bottom-line profits. Each of these topics have a lot rules for which we’ll need to dive deeper on so that a customized approach needs to be taken.  

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

Key Benefits of an 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 general, SMLLCs are relatively inexpensive to setup and maintain and may provide some liability protection.
  • It’s simple to file the initial formation paperwork in the state of your choice and the fees for doing so are quite low.
  • The informal structure does always not require boards of directors, shareholders, or meeting minutes though it is still advised.

Tax Implications

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.

States Differ

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 report the income and expenses (and pay the associated tax) from operations on their personal income tax returns.
  • However, the only way SMLLC owners can reap the tax benefits mentioned above is by staying on top of changing IRS regulations.