The Limited Liability Company (LLC) entity allows taxpayers to elect how they want to account for their federal tax liabilities. Many taxpayers do not understand what form of LLC to use to achieve their tax and asset protection goals.
The IRS regards a single member LLC as a disregarded entity which is not a separate taxable entity distinct from the owner, unless the owner opts to have the LLC treated as a corporation for tax purposes. As a disregarded entity the sole owner of the LLC can account for the profits and losses of the LLC on the taxpayer’s Schedule C of their personal tax return.
The sole owner of a single member LLC is personally responsible for employment taxes related to the LLC’s employees. The IRS has the ability to impose a lien or levy or seize the sole owner’s personal assets if the LLC’s employment taxes are not paid, but the IRS cannot levy or seize the LLC’s assets to satisfy this type of liability. It does not matter whether the owner elected to use their name and social security number for the LLC tax reporting or if the owner elected to use the LLC name and an Employer Identification Number (EIN) for the LLC tax reporting.
The liability for multi-member LLC may be different depending on the applicable state law. If the state law provides that members of LLC’s are not liable for LLC debts then the IRS’s recourse with regard to the LLC’s unpaid employment taxes lies with the LLC and not with the member owner.
When employees are involved, it may make sense to convert a single member LLC into multi-member LLC or to elect to have the LLC be taxed as a s-corporation.