Single Member LLC: What You Need to Know This Tax Season (2024)

one of the most popular types of  business entities in the united states   is the single member limited liability  company this type of llc only has one owner   and a single member llc is  usually a business registered   in the state where the company does business the  phrase single member is a admission that the llc   only has one owner and that owner is referred  to as a member now a single member llc has   so many benefits that are also shared with the  normal llc so in this video i'm going to break   down some of those advantages and disadvantages of  a single member llc in 2021 while also discussing   the typical operating agreement how taxes work  and compare that against sole proprietorship now let's go ahead and dive in by quickly  looking at what a llc is so loc stands for   limited liability company which is simply  a type of business entity you can create   when you choose to go into business example of  other entities would be a sole proprietorship   limited partnerships general partnerships s  corporations and of course c corporations all   of these business entities have their own unique  advantages and disadvantages and llcs are pretty   popular and most known for their advantage of  separating business assets from personal assets   thus protecting your personal assets from any  business related liabilities and for comparison   an llc with multiple owners are typically known as  a partnership llc and of course as we mentioned an   llc with one owner is known as a single member  llc and sometimes referred to as an smlc now   let's move on and talk about how a single member  llc is formed so if you want to start a business   and believe that a limited liability company is  the best entity type for you then you'll want   to go to your state's business division and gain  information about the specific process that you   need to follow usually this just involves going  to your secretary of state website following the   articles of organization or in some states called  certification of organization and then pay a   filing fee which usually ranges somewhere between  100 to 200 if you're doing it yourself along with   registering your business in your state you may  want to consider filing an operating agreement   for comparison the articles of organization  tell the state the new single member llc exists   puts it into the public eye and then shows people  how to contact the business should they need to   whereas the operating agreement lays out the most  important rules for how the single member llc   will be run generally the operating agreement  is not required to form a single member llc   although it is highly recommended that's because  a single member llc operating agreement offers   some many great benefits like these so number one  it provides rules that will supersede the default   provisions of your state's llc act so if you don't  agree with some of the things that your state has   in law then you can use this to serve as your  own operating agreement number two it serves as   an additional document that you can show the  potential lenders regarding the organization   of your business so if someone wants to invest  into your business then you can show them your   operating agreement which gives them some insight  to your plans and number three this is particular   for manager managed single member llcs which  basically means you are operating the business   which is that you can specifically specify who  will take over management of the business in   the event that the owner becomes incapacitated or  dies number four the operating agreement provides   an additional affirmation of the separation  between your business and from you personally   number five provides a point of reference for how  you originally intended to operate the business   now it's important to note that some banks that  you want to work with will expect you to have   an operating agreement all right now let's move  on and talk about some of those advantages of   a single member llc but really quick before i  do if this is your first time here welcome to   our channel i'm sean with life accounting the  accounting company that saves people from high   taxes and low profits if you're enjoying the video  so far please hit the like button below so that   youtube will show this video to more people like  you who want to learn about single member llc's   and if you're not subscribed yet you're missing  out because we drop new valuable videos just about   every week okay now let's move on to the benefits  of a single member llc now some people really   confuse sole proprietorship with a single member  llc because they're kind of similar but the single   member llc usually wins that's because a single  member loc is a separate business entity from its   owner it is no longer attached to or identifies  with the owner for tax or liability purposes   one big benefit of a single member loc is that the  llc is recognized as a legitimate business due to   the popularity in the requirement of the llc being  included in the business name also when a single   member llc is formed within a state part of the  approval process is the business name registration   which then protects any other business in the  state from using your business name so those are   some of the major pros of a single member llc but  of course a single member loc is not for everyone   and there are definitely some cons now i  won't cover that here because crystal did an   exceptional video comparing locs to s-corporations  which i'll link up above and sherman also has a   pretty great video on all the benefits of a llc  so if you want to learn more about that then i'll   link this one as well however one special thing to  note regarding single member llcs is that they are   the most common type of disregarded entity which  basically means the irs can ignore it for business   tax purposes and instead collect taxes through  the business owner's personal income tax filing   okay so let's dig into that a little bit more and  take a look at how a single member llc is taxed   now because single member llcs can be classified  as a disregarded entity the responsibility for   paying income taxes are passed through to the  owner this way of tax and profits is known as   pass-through taxation which then refers to llcs as  pass-through entities the primary business taxes   that you're gonna pay are gonna be federal income  taxes and self-employment taxes now to report and   pay federal income taxes as a single member llc  business you will need to complete a schedule   c which is a profit or lost business form which  is attached to your personal federal tax returns   that you file with the irs now that schedule c  will report all your business transactions such   as your income your expenses your assets and your  profits that's why it's critical as a business   owner that you're keeping track of all your  transactions throughout the year in preparation   for tax season here's a quick example that will  make single member llc taxes very clear let's say   that mary is someone who owns a single-member loc  part-time and owns a homemade bakery business last   year she earned a total of forty thousand dollars  from the business and had expenses totaling ten   thousand dollars for supplies equipment and other  items we'll say that mary also earned 25 000 from   her part-time job as a consultant so mary will use  the schedule c to show her income and expenses on   her homemade bakery business mary will then attach  the schedule c to her personal tax return where   she will report and pay taxes on her combined  net income of fifty five thousand dollars which   is thirty thousand dollars from the bakery and  twenty five thousand dollars from her part-time   job okay now the last thing you need to know  about single-member llc taxes is that you must   pay taxes on all profits whether you distribute  them or not the irs will not distinguish   between whether an owner of a single member llc  leaves the profits in the business bank account   reinvests the profits in the business or decides  to distribute the money as payment to the owner   okay so to the irs none of that matters because  it's a disregarded entity the irs only cares about   how much profit the business made and then it will  tax those profits the irs likely does this because   it doesn't want single member loc owners to take  out different amounts of money out of the business   each year which could lead to manipulation  of taxes here's another example let's say   that joe sells car parts and he made a profit  of a hundred thousand dollars in 2020 after   expenses joe knows he needs to have at least forty  thousand dollars next year to buy more inventory   however even if he leaves the forty thousand  dollars in his company account for next year   for those related business expenses he will still  have to report and pay taxes on the full 100 000   okay so this is why having a good accountant  on your side that can help you with your tax   planning your bookkeeping and your tax preparation  is so very important which by the way tax season   is here and we're back in full operations for  this tax season so if you or someone you know   needs help with your business taxes then contact  us at lifeaccounting.com if you would like to hire   our team for bookkeeping or tax preparation  the other tax for single member llcs are   self-employment taxes which is a tax that active  business owners will need to pay now the 2021   self-employment tax rate is 15.3 percent that  rate is the sum of a 12.4 tax for social security   and a 2.9 tax for medicare the self-employment  tax applies to the net earnings of your company   or your profits or your company and you may need  to pay self-employment taxes throughout the year   now generally 92.35 of your net earnings from  self-employment is subject to self-employment   tax so the irs has given us about a seven percent  to eight percent break on our profit once you've   determined how much your net earnings  from self-employment are subject to tax   then you can apply to 15.3 tax rate and that  should give you your taxes owed now for 2020   only the first 137 700 of earnings were subject to  social security portion of the self-employment tax   and in 2021 that amount rose to 142 800 all  right now the last thing i want to talk about   is for a sole owner of an llc you will want to  have an employer id number even if the business   has no employees that's because most banks require  an employee identification number also known as   a ein to open any kind of business account also  you may find later that other clients or vendors   may also require your ein to report their income  or their expenses from your company getting your   ein is super easy all you need to do is go to the  irs website and complete an online application   and then your ein will be emailed and mailed to  you i'll put a link in the description below if   you want access to that online application if  you need to apply for your own ein so there   you have it i went over everything you need  to know about single member llcs going into   2021 so if this information was even a little  bit helpful don't forget to like this video   and subscribe for more videos and if you have any  questions then please write them in the comments   section below and remember our team is available  to hire this tax season well that's it for now   i'm sean and as always thank you so so much  for watching and i'll see you in my next video you

Channel: LYFE Accounting

Views: 259,005

Keywords: single member llc, everything you need for your single member llc, what to know about a single member llc, how a single member llc works, single member llc taxes

Id: iHy1xLYqS6Q

Length: 12min 31sec (751 seconds)

Published: Wed Feb 17 2021