Advantages of the Single-Member LLC and the Disregarded Entity Rules

The limited liability company (LLC) is a relatively modern invention that has grown rapidly in popularity and for good reason. Generally, an LLC is a business entity that is legally distinct and separate from its owners, or rather its members.  As a result, the LLC provides its members with significant protection from liability to third parties, like a traditional corporation provides to its shareholders.

However, the LLC has some advantages over the corporation, including :

• An LLC is generally subject to less administrative requirements than a corporation.
• An LLC may elect to be taxed as a partnership, corporation, or s-corporation.
• An LLC that is wholly owned by a single member may be treated as a “disregarded entity” for federal income tax purposes.

What are the benefits of a disregarded entity?

• A disregarded entity will not need to file a separate income tax return because its income or loss will pass-through to its sole member.
• A single-member LLC that is not taxed as a corporation, has no employees, and is not subject to excise taxes does not even need to apply for a separate Employer Identification Number (EIN).[1] Instead, such a disregarded entity may use the taxpayer identification number of its sole member. However, if another party, such as a bank, insists that the disregarded entity provide its own EIN, then the disregarded entity may obtain one for convenience.

Thus, the disregarded entity rules can provide significant benefits in the form of simplified income tax compliance and reporting.

For example, if a single collection of individuals and/or entities plans to invest in multiple real estate properties, it may be beneficial to place each separate investment property in a separate LLC, given that an LLC is relatively inexpensive to create and maintain. However, if each separate LLC was owned by the same collection persons, then each separate LLC would need to file a separate tax return.

Alternatively, if the same collection of persons formed a parent LLC that in turn was the sole member of each subsidiary LLC, then each subsidiary LLC would be treated as a disregarded entity and only the parent LLC need file a tax return, likely easing income tax compliance and reporting costs.

Note that the disregarded entity rules generally apply to federal income taxes.[2] As alluded to above, other taxes may still apply to the entity, including without limitation employment taxes and excise taxes. Also, there are many factors other than those introduced above to consider when choosing the appropriate entity for a business. A consultation with a professional is strongly encouraged.

Posted by Attorney Bryan J. Schrempf. Schrempf represents clients in a wide variety of transactions for new and existing businesses, including mergers and acquisitions, business and employment contracts, and real estate transactions, and lawsuits related to business and commercial disputes, real estate, and employment law. He also advises clients on their estate plans and represents them in probate, estate and trust administration, and fiduciary litigation.

Published in the October 2023 St. Louis Small Business Monthly.

[1] Note that an individual owner or member of a disregarded entity is generally treated as self-employed for purposes of SECA taxes and not as an employee of the disregarded entity for employment tax purposes.

[2] Most states tend to follow the federal tax classification of LLCs for state income tax purposes.

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