What You Need to Know as a Single Member LLC
Many solo business owners opt to form their company as an LLC, and for good reason. It protects personal assets, to an extent. What many don’t know is what it means to be an LLC from an accounting/tax perspective. There’s two topics you need to know about if you’re a single member LLC.
Commingling Funds. Commingling happens when non-business income or expenses gets blended with business transactions. For example, if you pay personal expenses directly out of your business bank account, that’s commingling. The problem with commingling is that your LLC status could become jeopardized. Courts can “pierce the corporate veil” and your personal assets would lose the protection that the LLC status gives.
How to Avoid Commingling. The best thing to do is have separate bank accounts and credit cards, for starters. If you need money from the company to take care of personal expenses, take a lump-sum owner’s draw out of the company’s bank account. Either write a company check to yourself or transfer funds from one account to the other. Ensure the transaction is well-documented, making it clear that it is an owner’s draw. As a single member LLC, you have the flexibility to withdraw funds as you please. Just don’t pay personal expenses directly out of the business account. Sometimes the opposite situation occurs – you pay business expenses with personal money. In this case, record the expense on your books with the offset being an owner contribution. Save the receipt. The optimal scenario, however, is to not pay business expenses with personal funds or, if the business account is short on cash, deposit personal funds into the business account and then pay business expenses out of there. The more you segregate, the better off you’ll be. It also makes the accounting less confusing.
Filing Taxes. This seems to be an area of confusion for single member LLC owners – how to file taxes. You have two options:
File as a Disregarded Entity. By default, a single member LLC is considered a disregarded entity. This means that the IRS does not see your LLC as an entity separate from you. You file your personal income tax return and include a Schedule C, which lists your LLC’s income and expenses. You do not file a business tax return.
File as an S Corporation. You also have the option to be treated as an S Corporation by the IRS. Keep in mind this is only for your tax return. You are still an LLC. In this case, the IRS recognizes your LLC as its own entity and a business return is filed separate from your personal return. To take the election, Form 2553 is filed with the IRS.
Which is the Better Way to File? It depends on your situation. There are pros and cons to both. As an S Corporation filer, you would have to get two tax returns prepared instead of one. The potential tax savings, however, could exceed the extra cost of preparing an additional return. Consult with your tax planner, attorney, or both to determine which option will give you the maximum results. Click HERE for more information about the advantages and disadvantages of filing as an S Corporation.