Single member LLC

How a single-member LLC is taxed

By default the IRS treats your single-member LLC as a disregarded entity. That means:

• No separate federal tax return for the LLC.
• Profit or loss flows onto Schedule C of your personal Form 1040.
• You pay regular income tax + self-employment tax (15.3%) on net earnings.
• For state and local tax, treatment varies — most states follow federal.

You can later file Form 2553 to be taxed as an S-corporation, which lets you pay yourself a reasonable W-2 salary and take the rest as distributions (not subject to self-employment tax). This usually only pencils out once net business income clears ~$60–80k/year.

The Schedule C runs on the same 1040 as your W-2 (if you also have one), interest income, etc. Business losses can offset other income — useful in year one when expenses outpace revenue. Track every business expense from the day you form: home office, mileage, software subscriptions, contractor payments, business meals (50% deductible), and a chunk of your phone and internet.

Single-member LLC vs sole proprietorship

Same person, same work, same Schedule C. The only difference is what sits between you and a lawsuit:

• Sole prop: no legal entity. A client lawsuit, contractor injury, or unpaid vendor reaches your personal bank account, car, and house.
• Single-member LLC: a state-recognized entity. Properly maintained, it stops creditors of the business at the LLC's assets.

Cost of the upgrade: a one-time state filing fee ($50–$500 depending on state), an annual report (varies), and a registered agent. For most freelancers earning more than ~$30k/year, that's cheap insurance against one bad lawsuit. See the full breakdown in LLC vs sole proprietorship.

3 things every single-member LLC needs

Protecting your liability shield

An LLC only protects you if you treat it like a real entity. Single-member LLCs get scrutinized harder than multi-member ones because there's no second owner to enforce formality. To keep the shield intact:

• Separate bank account in the LLC's name with the LLC's EIN.
• Sign contracts as "Member, [LLC Name]" — never just your personal name.
• Run payroll, vendor payments, and revenue through the LLC account only.
• Move money between you and the LLC as documented capital contributions or distributions — not random transfers.
• Keep an operating agreement, even though it's a contract with yourself.
• File the annual report and pay state franchise tax on time.

When to elect S-corp

S-corp election lets you split your pay between a reasonable W-2 salary (subject to payroll/SE tax) and distributions (no SE tax). The savings can be real — but so is the overhead.

Rough math: at $120,000 of net profit, a single-member LLC owner pays ~15.3% SE tax on most of it. As an S-corp paying a $70,000 reasonable salary, you'd pay payroll tax on $70,000 and take $50,000 as distributions, saving ~$7,000 in SE tax. Subtract ~$1,500/yr in payroll and CPA overhead, and you net ~$5,500.

Rule of thumb: elect once net profit reliably exceeds ~$60–80k/year after your reasonable salary. Below that, the savings don't justify the overhead.

Non-US owners — extra forms

A single-member LLC owned by a non-US person is still a disregarded entity by default. But it owes Form 5472 + pro-forma 1120 every year, even if it made no money, as long as there were any related-party transactions (which includes the owner funding the LLC). The IRS penalty for missing Form 5472 is $25,000 per year — make sure your CPA handles it. See LLC for non-residents.

Best states for a single-member LLC

For most US founders the answer is your home state — that's where you actually do business. Forming out-of-state usually triggers foreign qualification in your home state anyway, costing you two filings instead of one.

For non-US founders without a US nexus, the standard picks are:

• Wyoming — $100 to file, $60 annual report, strong privacy.
• New Mexico — $50 to file, no annual report, lowest ongoing cost.
• Delaware — $110 to file, $300/yr franchise tax, recognized brand for outside investors.

Common mistakes

• Skipping the operating agreement

  Single-owner LLCs especially need one — it's the documentation that proves the LLC is real and separate from you.

• Running personal expenses through the business card

  Fastest way to lose the liability shield. Reimburse personal items from a separate transfer, not by spending the LLC card.

• Forgetting the EIN

  You'll need it to open a bank account, accept payments through Stripe/PayPal Business, or hire a contractor.

• Missing the annual report

  Most states will administratively dissolve your LLC after one or two missed reports. Reinstating costs more than just filing.

• Electing S-corp too early

  Below ~$60–80k of net profit, payroll and CPA overhead wipe out the SE-tax savings.