Discussion:Single-member LLC

I understand that Schedule C is the preferred reporting mechanism, but I have not seen any published legal authority which *requires* that treatment as opposed to filing as a separate entity then reporting the owner's interest on a Schedule-K1.

An LLC that has only a single member and is not required to be classified as a corporation will automatically default to the classification of disregarded entity. The disregarded entity files as a sole proprietorship and completes the appropriate schedules as part of the single owners Form 1040.

http://www.irs.gov/businesses/small/article/0,,id=137016,00.html

for the EIN simply did not indicate it was solely owned.

Re the question of law/regs on partnership treatment, I am curious as well and here is why: the most audited schedule as we all know is Sch C. I'd rather have my sole owning LLC client file a 1065 if possible. I don't want to elect corp status for him either because of adverse tax consequences such as appreciated property triggering cap gains on distribution out of a corp. I'd like to file 1065 for him. Anyone else have any tangible authority on this?

You guys are either way overthinking this or need to brush up on the very basics of taxation or are the type to argue that the federal income tax is unconstitutional...I don't know and can't tell which.

If I offended anyone, please know that it was not intentional.

Single member LLC defaults to Schedule C - or can elect to be a corporation (or an S corporation) - Those are your choices period for a single member unless the LLC is one of the exceptions listed in the regs - which except for insurance companies I consider pretty rare types of company situations - but botom line no election - single member files Schedule C

Two or more members - defaults to a partnership (unless you get into the community law states with a husband/wife) or it can elect to be a corporation (or an S corporation) - but again bottom line no election - two or more member LLC files 1065

So I guess, I also don't understand what you don't understand about the tax laws for an LLC.

If a client intends to only use the LLC for holding rental property and the two members are husband and wife is it still considered a "two person" LLC In other words does it need to have either the husband or wife as the only member in order to default to schedule "E" for reporting the income and expenses. Most of the default discussion seems to assume that the LLC is involved in business and would default to schedule "C". I am also having clients inquire regarding multiple properties and using multiple LLC's It seems as though they need to get EIN's and separate bank accounts in order to maximum the asset protection aspects. Any comments? Thanks

The safe thing seems to be to use a single member LLC in order to use schedule E. Even the attorneys don't seem to have the answer regarding getting an EIN for each LLC which is holding a property. One taxpayer supposedly is holding eleven properties in separate LLC's and is running all properties through one bank account.

You echoed my response to my client who brought this up. You have confirmed Thanks

I've had the question of leased employees come up before, but I have a new wrinkle and need some insite. I have a new client who is an SMLLC. He leased his employees prior to June of 2007, including himself. Prior year returns have been prepared by a CPA with no adjustment for the single member's W-2 wage, files he provided me go back to 2003 and there seem to have been no issues with the SM's W-2 as a leased employee. Proper Schedule C has been filed with additional SE taxes paid. Now comes July 2007, when they terminate the leased employee arrangement and take payroll in-house with the SM still on payroll. I didn't think of it at the time of the change, but I'm thinking now we may need to amend the returns and remove him as an employee, which will affect everything from payroll taxes to the pension plan. Anticipate a giant mess. The alternative could be to do a late S-election, in which case we wouldn't need to change any of the payroll. Suggestions anyone?

I would not amend the prior returns, I would just get it right going forward (2008). Is that the easy way out?????

mine are all still

(boys and their toys)

I think I need to go home

Bye Kevin

I have a Sole Prop - was sole prop to say...4/1/07 at which time he forms a SMLLC for the same business (changing the name)- kept the same office used the same equip & had the same clients....Do I need to go through the exercise (I think yes) of bifurcating the year or can I be lazy & combine to 1 Sch C..... Maybe I shouldn't even be asking since I think I know the answer.....

2) you are using the term 'residual income' incorrectly - I think in Accounting 101 they call this 'profit'.

In a snide way, one could retort - where do you think a Net Income of $43,000 should be declared? Is it not "Earned Income" subject to FICA and FIT? or is one to believe that by forming an LLC - you can just Poof - the Income Tax consequences away.

We ask everyone to post a profile, especially pros, just like you did. Since he has not, he won't get an answer unless someone is feeling charitable.

Tom

Single Member LLC (disregarded entity) purchases real estate in 2002 (say $500k purchase) The LLC hods the real estate for several years, incurring expenses and adding capitalized improvements. ($200k improvements) In 2006, the SM LLC sells the real estate for $1mm and for its trouble receives a 1099-S reporting $1mm of revenue. All along, the operating costs were reported dutifully on Sch C. The SM LLC has numerous other assets.

Where does the $1MM get reported on the owner's return? Where does the cost basis of $700k get reported on the owner's return? What is the published legal authority for your answer?

BTW, Sch C is only one of the possibilities for properly reporting taxable transactions for a SMLLC. Other possibilities include Form 1040, Scheds D, E, F, Forms 1065, 1120 or 1120S (I'm sure there are additional possibilities). Your post leads me to believe "the operating costs were reported dutifully on Sch C" incorrectly. More facts are needed. Please be sure to inform your tax advisor of all the facts once you engage him/her.

Your contention that an SM-LLC can EVER use Form 1065 is entirely wrong. Yes, the SM-LCC could elect to be treated as a corporation (Form 1120), but the default without the election is the same as sole proprietorship. Clearly, you didn't know the answer, so you are not worthy of my checkbook being pulled out ... I am trying to correct my ignorance (and that of my paid advisors) and this forum tends to have a high degree of domain experts to learn from ... hopefully one of them will take the time to answer my question rather than flame me.

Answers in tax are not always black and white but are highly fact dependent. RE in the hands of a developer typically is inventory, not a capital asset. Sale of condo units after the developer builds the condo are ordinary income, not capital gain transactions.

It sounds as though you have already staked out a position that your activities constitute a business and that position has already been approved in an audit. If so, then it sounds to me like you've already determined your fate, namely that the sale of the property constitutes the sale of inventory and is therefore reportable on Sch C and would not be eligible for capital gains treatment.

Hope that helps. Don't know why your multiple CPA's and tax attorneys cannot provide you with clearer guidance. Take heart though. If you report the sale as ordinary income you will be paying ordinary tax rates and SE tax on the profit, so it is a slam dunk that if audited no auditor will take a contrary position.

A client setup an LLC by himself. When filling up the SS-4 listed it as a SMLLC. Here's the twist, the only member is an S-Corp. The question is how to report the LLC activity?

Since the S-Corp does not have a schedule C and since there is no K-1, how to report the activity? I suggested to the client adding himself and filing 1065, but he insist to have the S-Corp as the only member.

Any suggestions?

Now the question: When he files his Articles of Organization with CA, does he need to include another person as a manager so that he can have his board meetings in American Samoa (or some other place with a US nexus, like Hawaii)? It's tough to have a meeting with yourself unless your name is Sybil (obscure movie reference). My guess is that it is not necessary because managers and/or members could come and go. Also, is it necessary to file new Articles with the state when new members are added?