this as a single-member LLC. The problem is, some states do not allow single-member LLCs, and others that do might classify them as corporations or partnerships, or otherwise impose entity level taxes on them. For a full discussion on choosing an entity, see Chapter Three of J.K. Lasser's Taxes Made Easy for Your Home-Based Business.
Allowance of Single Member LLCs
Currently, single member LLCs are allowed in nearly all jurisdictions. Check with your department of revenue or the Secretary of State for the rules in your jurisdiction..
Classification of Single Member LLCs
With the finalization of the "check the box" regulations, there is no longer uncertainty about how an LLC will be classified at the federal level. Under these regulations, a single member LLC is disregarded as an entity separate from its owner, unless the owner makes an election to be treated as a corporation. [Treas. Reg. §301.7701-3(b)(1)(ii)]. That means you file Schedule C and treat your LLC just like an unincorporated sole proprietorship for federal tax purposes. Most states have now indicated through regulations or public rulings that they will conform to the simplified federal classification, although some states impose a tax at the entity level. Only the state of Arkansas has announced that it will not conform to the disregarded entity rules for single-member LLCs. In Arkansas, for state tax purposes, you must file a partnership return.
Entity Level Tax on LLCs
Of those states that allow single-member LLCs, Michigan, New Hampshire and Texas, impose a substantial entity level tax. Many other states impose smaller annual fees. Check with your state's Secretary of State or department of revenue for the latest information.
See "What Are the States Doing on the Check-the-Box Regs?" by Scott D. Smith, Tax Notes, Aug. 18, 1997, p. 973 and "The LLC/LLP Scorecard" by Bruce P. Ely, Christopher R. Grissom, Tax Notes, November 23, 1998, p. 1005.
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