4 Tax Tips for Single-Member LLCs
[This article was written by Anthony Christensen.]
It goes without saying that many entrepreneurs start limited liability companies, or LLCs, looking for tax advantages. When combined with the relatively light paperwork requirements of maintaining their company, business owners often find their plans coming to fruition much faster than they originally thought. However, despite the voluminous potential for both savings and efficiency gains, many single-member LLCs miss one or more of their biggest advantages for the simple reason they don’t know it’s there until it is too late.
A single-member LLC is a limited liability company formed with only one equity holder who also functions as that LLCs managing member. The moment any other entity, even another company, obtains equity in the LLC, its “single member” status is canceled until all but the original owner’s equity is sold back.
If you operate a single-member LLC and you are looking for tax advantages, here are some things to keep in mind.
For most intents and purposes, at least when it comes to taxes, a single-member LLC is a “limited liability sole proprietorship.” Income “passes through” the LLC and becomes taxable to the single owner as if the income were earned by that single member directly. This means any tax advantages that can be obtained by that single member apply directly to any and all income earned by the LLC. Optimizing for the single member’s advantages can therefore be a powerful strategy for reducing the company’s tax burden.
Since legally an LLC is a separate entity, there is nothing stopping that LLC from employing its owner. From a tax standpoint, this can be a magnificent opportunity to reduce tax expense, as nearly all the costs related to employees are deductible at the federal level and often also at the state level to a certain degree.
While employing yourself can have significant paperwork requirements attached, the extra workload can be extremely lucrative, especially if you are working on a commission basis and are also responsible for the company’s sales.
If you own or even if you rent the place you work, your LLC is entitled to a tax deduction in the “home office” category. The rules on how much of your personal housing costs can be shielded and how the space can be utilized can get a little arcane without the help of an accountant, but the benefits can’t be denied, especially considering they are virtually permanent. With the assistance of modern technology, it is quite easy to establish and preserve your deduction for a home office as well. From a priority standpoint, this should be near the top of your list, especially when you are just starting out.
If you utilize your new LLC as a platform for doing contract work for clients like Maverick Trading, there are a couple of additional things you need to keep in mind. First, clients won’t be making any contributions on your behalf with regard to taxes, including payroll contributions. You are responsible for all those costs, so you need to fold them into your pricing. Second, your income will be subject to quarterly payments for estimated tax. This is the self-employment version of withholding. There will be costs associated with preparing those payments every three months, which you’ll need to keep in mind as well.
Obtaining permission to utilize intellectual property is called “licensing.” If you own two businesses, and one has to pay the other for the use of its trademarks or copyrights, the business paying the licensing fee has another category of costs it can deduct. This can reduce the overall tax burden of both companies, as the licensor may be able to cancel its tax liability altogether based on what it collects, while the licensee reduces its tax burden with a monthly or quarterly fee.
While the paperwork requirements for some of these kinds of accounting initiatives can be formidable, the truth is single-member LLCs live and die on their cash flow. Reducing your tax burden is the best way to preserve that vital resource.
Anthony Christensen is a writer, digital marketer, and entrepreneur. Owner of Astronautical LLC.