By: Tamara B. Pow, Esq.
If an LLC has two or more members, it is treated as a partnership for tax purposes unless it elects to be treated as a corporation. However, an LLC with only one member cannot be a partnership, so it will be treated as a disregarded entity, like a sole proprietorship, for federal and California income tax purposes (income taxes only, not California franchise taxes). This means the member gets the benefit of the LLC protection without the additional cost or hassle of filing a separate federal tax return for the entity. All income and expenses of the single member LLC will be reported on the member’s individual tax return as a sole proprietorship (Schedule C for business, Schedule E for rental property, Schedule F for farm activities). If the sole member is a corporation or other business entity, the income and expenses of the LLC will be reported on the member’s tax return as a division of that company. The single member LLC must still file certain pages of the California LLC return Form 568 in order to pay the annual tax and LLC fee (if applicable). If the member is not a resident of California, and has not consented to California’s jurisdiction on the first page of the Form 568, then the LLC must pay the tax on behalf of its sole member.
Because a single member LLC is disregarded for federal income tax purposes, it can be a shareholder in an S corporation, and the member will be treated as the owner of the S corporation stock for income tax purposes.
A husband and wife who own an LLC as community property may choose to either act as one member and report the LLC income on their joint Form 1040, or as two members and file a partnership return for their LLC. Some prefer a single member LLC for simplicity and reduced tax return filings. Others may prefer to separate their business income from their individual income by filing a partnership tax return for their LLC.
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