One of the most popular business entities these days is a limited liability company. If you intend to be the sole owner, you need to understand something about the tax issue.
A limited liability company has truly revolutionized the world of business. An incredible small company gives you protection from corporate responsibility without any formalities. From a tax perspective, it can even be taxed as a partnership with one big exception. In order to understand the exception, we have to retreat backwards.
To the surprise of many, a limited liability company is a relatively new form of business. Wyoming created a blue sky in 1979. While doctors said they were trying to be friendly in business, they were really trying to find a way to generate more tax revenues. What is the better way to create a new, flexible entity that is perfect for small businesses? Well, it's a bit slow to find something, but there was just one twitch.
From 1979 to the late 1980s, LLC was more or less unnoticed. Why? The IRS has been thinking about how it will be taxed for a long time. Will it be taxed as a corporation or as a partnership? Should a new section of the tax code be created for it? The IRS has never really come up with a good answer, so they allow people to choose whether they want to be taxed as a corpus or partnership. The most chosen partnership and everything was fine.
Countries are jealous of each other. When the IRS finally realized that it would tax a limited liability company, all other countries immediately began to pass laws that allowed LLC to form in their own countries. Most of the laws even allowed one person to form an entity. This has caused immediate problems when most of these sole LLC companies submitted tax returns for partnership.
Partnership is a business venture between two or more people. This is the basic legal axiom that existed forever. It is also embedded in the tax code. Probably you can guess the problem. In order for an LLC owner to submit taxes as a partnership. There is only one person!
After some discussion, the IRS made a decision. One owner of LLC is treated as a self-employed enterprise for tax purposes. You're probably wondering why you should worry? Well, the decision means that you have to pay 15.2% of the self-employment tax if you are the proud owner of an LLC owner. Most people do not know when they decide to form an entity and get a very nasty surprise when it's time to pay for Uncle Sam.
If you want to form only one LLC owner, there's nothing wrong with that. Just make sure you know that the self-employment tax will be paid and you have the money to pay for it.