Sometimes the number of owners a business has affects what types of entities it is allowed to operate as. While a corporation can have one or more owners (shareholders), a partnership by definition must have two or more owners. An LLC can be thought of as a hybrid between corporations and partnerships, so can it have only a single owner (member)? It depends.
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| Image borrowed from www.corporatedirect.com |
The federal government's position changes depending upon how an LLC elects to be taxed. LLCs have the option to be taxed as either a corporation or a partnership, but the default rule is that LLCs are taxed as partnerships. If a single-member LLC elects to be taxed as a corporation, then the federal government will recognize the LLC as a corporation. However, if a single-member LLC elects to be taxed as a partnership, then the federal government will treat the LLC as a "disregarded entity".
The federal government essentially creates a legal fiction that the disregarded entity does not exist. It looks through the disregarded entity and attributes all of the entity's actions to its owner. The owner is required to report the entity's income on its own tax return.
California, however, does not treat a single-member LLC any differently than any other LLC. The LLC is required to file its own tax return for California. In addition, because LLCs are created under state law, a single-member LLC has all of the same legal protections that any other LLC would have, such as limited liability protection. If you would like a better understanding of a single-member LLC's legal rights, I would recommend talking to a business law attorney.
If you have any questions regarding how a sigle-member LLC is taxed, please send me an e-mail.
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