The formation of a single-member LLC and the formation of a single-member PLLC are permissible under the Revised LLC Act in Tennessee (T.C.A. §48- 249-501c). In fact, all 50 states now recognize single-member LLC’s.
A single-member LLC is a disregarded entity for federal tax purposes. Therefore, if the single-member is an individual, the business income is reported on the member’s personal tax return on Schedule C of Form 1040. A single-member LLC is subject to Tennessee franchise and excise taxes. However, a single-member LLC may reduce its net earnings by the amount of self-employment income (whether or not actually distributed) with the result that a single-member LLC engaged in a service business will incur little, if any,
excise tax even if it retains earnings in the business.
In theory, the single-member LLC provides the owner with the same limited liability protection available to a multi-member LLC. Because the single- member LLC is a new business form, the legal treatment regarding the liability of such entities is somewhat unknown.
A single member LLC must pay the State of Tennessee an initial formation fee of $300 and then an annual filing fee of $300.
Over the years, there has been confusion regarding Single Member Limited Liability Companies (Smells) in general and specifically, how they can report and pay employment taxes.
An LLC is a new entity created by state statute. The IRS did not create a new tax classification for the LLC when it was created by the states; instead IRS uses the tax entity classifications it has always had for business taxpayers: corporation, partnership, or sole proprietor. An LLC is always classified by federal law as one of these types of taxable entities.
A single member LLC (SMLLC) can be either a corporation or a single member “disregarded entity”. Again, to be treated by federal law as a corporation, the SMLLC has to file Form 8832 and elect to be classified as a corporation. An SMLLC that does not elect to be a corporation will be classified by the existing federal guidance as a Disregarded Entity which is taxed as a sole proprietor for income taxes.
The confusion in this area arises when determining employment tax requirements for an SMLLC that is a disregarded entity. Notice 99-6 gives the SMLLC classified as a “disregarded entity” two options for reporting and paying employment taxes:
- Using the name and EIN assigned to the LLC, or
- Using the name and EIN of the single member owner
- Even if the employment tax obligations are reported using the SMLLC’s name and employer identification number (EIN), the single member owner retains ultimate responsibility for collecting, reporting and paying over the employment taxes.
An SMLLC that is a disregarded entity and does not have or will not have employees does not need an EIN. It should use the name and TIN of the single member owner for federal tax purposes. However, if a SMLLC, whose taxable income and loss will be reported by the single member owner, nevertheless needs an EIN to open a bank account or if state tax law requires the SMLLC to have a federal EIN, then the SMLLC can apply for and obtain an EIN. If the SMLLC has no employees, it will not use this EIN for any federal
tax reporting purpose.
If an SMLLC has or intends to have employees, the EIN rules are different. If there is or will be employment tax reporting, both the single member owner and the SMLLC will need an EIN (two EIN’s). If the SMLLC has already received an EIN for reasons set out in the above paragraph, then only the owner will need to file the SS-4 and be assigned an EIN.
These numbers should not be used interchangeably. Doing so will result in complicated problems which could require the taxpayer’s, practitioner’s, and IRS’s resources to correct. There are also instructions contained in Notice 99-6 which limit changing back and forth between reporting under the SMLLC or the single member owner’s EIN’s. Be sure to review this notice and its limitations before making a
The SMLLC continues to be disregarded for other federal tax purposes.
After January 1, 2009, the SMLLC will be responsible for collecting, reporting and paying over employment tax obligations using the name and EIN assigned to the LLC. Filing Federal Tax Forms If the LLC is a sole proprietor for federal tax purposes, the entity should file either:
- Form 1040 Schedule C, Profit or Loss from Business (Sole Proprietorship)
- Form 1040 Schedule E, Supplemental Income or Loss
- Form 1040 Schedule F, Profit or Loss from Farming
- Form 1040 Schedule J, Income Averaging for Farmers and Fisherman
If the business has net income over $400, it may be required to file Schedule SE, Self-Employment Tax.