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Editorial 7 MIN READ

The single-member LLC, six years on

What the 2016 case for the one-owner LLC looks like after FinCEN, §199A, and a decade of veil-piercing opinions

The Editors
Staff, Incorporator.org
7 min read Updated
Contents 5 sections
  1. The federal tax picture, slightly updated
  2. The state liability shield, honestly
  3. The Corporate Transparency Act, now locked in
  4. Who the SMLLC still makes sense for
  5. Sources

he single-member LLC is still the default wrapper for the one-person business, and it still costs roughly what it did in 2016. What changed is the paperwork around it.

This is a reappraisal, six years on, of the form this site covered in its Delaware LLC formation guide. The federal tax mechanics are broadly the same. The state liability picture has gotten harder to defend. And a new federal reporting regime, locked in by FinCEN's final rule at the end of September, is about to make the SMLLC a named entity on a government list for the first time in its history.

The federal tax picture, slightly updated

By default, a domestic LLC with one owner is disregarded as an entity separate from its owner for federal income tax purposes. The authority is Treasury Regulation § 301.7701-3(b)(1)(ii), which treats a single- member domestic eligible entity as disregarded unless the owner files Form 8832 to elect corporate treatment. In practice this means the owner reports the business on Schedule C of Form 1040 if the business is active, or on Schedule E if the SMLLC holds rental real estate. No separate federal income tax return is filed for the LLC itself.

The owner pays self-employment tax on the net earnings from self- employment under IRC § 1402, at the combined 15.3% rate (12.4% Social Security up to the wage base, 2.9% Medicare without a cap, plus the 0.9% Additional Medicare Tax above the statutory thresholds). For a profitable one-person services business, the SE tax is the single largest line item after federal income tax, and it is the arithmetic that sends owners toward S-corporation elections once net earnings cross roughly $60,000 to $80,000.

The §199A qualified business income deduction is still available to the SMLLC owner, with the 2022 inflation-adjusted thresholds set by Rev. Proc. 2021-45: the taxable income threshold above which the specified service trade or business limits and the W-2 wage limits start to phase in is $170,050 for single filers and $340,100 for married-filing-jointly. Below those thresholds, most SMLLC owners simply take 20% of qualified business income. Above them, the calculation gets meaningfully harder, and an SSTB (consulting, law, health, financial services, and the other categories enumerated in §199A(d)(2)) phases out entirely by $220,050 single / $440,100 joint.

Two 2022-era administrative shifts deserve attention. First, Form 1099-NEC has fully displaced the old Box 7 of Form 1099-MISC for reporting payments to nonemployee contractors; the $600 threshold is unchanged but the form and its January 31 filing deadline are now the routine channel. Second, the American Rescue Plan's change to the Form 1099-K threshold, dropping it from $20,000 and 200 transactions to $600 with no transaction floor, is on the books for 2022 payments. Every SMLLC owner taking card or marketplace payments should assume they will receive a 1099-K reflecting gross receipts, and they should reconcile it to Schedule C rather than ignore it.

The state liability shield, honestly

The operational case for the LLC over a sole proprietorship is the liability shield. In 2016 this was presented, correctly, as a fifty- state variable. In 2022 it deserves a harder look.

The Florida Supreme Court's decision in Olmstead v. FTC, 44 So. 3d 76 (Fla. 2010), held that a judgment creditor of a single-member LLC's sole owner could reach the LLC's assets directly through the execution statute, because the charging order remedy that protects multi-member LLC interests from outside creditors was, in the court's reading, structured around the protection of non-debtor members. Olmstead was a shock at the time and Florida's legislature partially responded in 2013 with statutory language reinforcing the charging order as exclusive for multi-member LLCs and explicitly not exclusive for single-member LLCs. Other states have been watching. Courts in several jurisdictions have cited Olmstead or reasoned along similar lines when weighing whether charging-order exclusivity applies to a one- member vehicle, and the trend line through the 2010s has been toward treating the single-member LLC as a weaker fortress than its two- member cousin.

The practical lesson is not that the SMLLC has no shield. It has a shield. The lesson is that the shield is thinner than founders assume, and that the standard housekeeping (separate bank account, signed operating agreement, observed formalities, adequate capitalization, no personal-use commingling) matters more for a one-member vehicle than for one with a partner. Piercing the veil in a single-member case does not require proving a conspiracy; it often requires only a tolerably clean record of the owner treating the LLC as a pocket.

The Corporate Transparency Act, now locked in

The single largest substantive change since 2016 is a reporting regime that did not exist then. The Corporate Transparency Act, codified at 31 U.S.C. § 5336, requires "reporting companies" to file beneficial ownership information with the Financial Crimes Enforcement Network. FinCEN issued its final rule on September 30, 2022, at 87 Fed. Reg. 59498, with reporting obligations beginning January 1, 2024.

An SMLLC formed by filing a document with a secretary of state is a reporting company. Read the statute plainly: § 5336(a)(11)(A) defines a reporting company as a corporation, limited liability company, or other similar entity created by the filing of a document with a secretary of state or a similar office. There is a list of 23 exemptions in § 5336(a)(11)(B); none of them exempts an SMLLC by virtue of being single-member. The exemptions are for banks, public companies, regulated pooled investment vehicles, large operating companies (more than 20 full-time U.S. employees, more than $5 million in U.S. gross receipts, and a physical office in the United States), and similar regulated or already-disclosed entities. The typical consultant, landlord, Etsy seller, or holding-company SMLLC qualifies for exactly none of them.

What the SMLLC owner will have to file is the entity's legal name, any trade names, the principal place of business, the jurisdiction of formation, and a taxpayer identification number; plus, for each beneficial owner (which in the SMLLC case is the single owner, plus anyone else with substantial control), the individual's legal name, date of birth, residential address, and a unique identifying number from an acceptable identification document along with an image of that document. Companies formed on or after January 1, 2024 will also file information about the "company applicant." Entities in existence before January 1, 2024 have until January 1, 2025 to file an initial report; entities formed during 2024 will have 30 days (later amended, but that is the baseline in the September 2022 rule) from formation.

The CTA is the first time the federal government has asked the natural-person owner of a routine small LLC to identify themselves, by name and home address and ID photograph, to a federal law- enforcement bureau. It is worth taking seriously. The civil penalty for willful failure to report is $500 per day, and the criminal penalty is up to two years and $10,000.

Who the SMLLC still makes sense for

The SMLLC is still the right answer for most one-person businesses that are not in an S-corp-worthy income band and not operating a regulated profession through a PC or PLLC.

For a side business expected to stay small, the SMLLC offers a real if modest liability shield, a disregarded federal tax posture that adds almost no friction, access to §199A on ordinary QBI, and a state filing that usually runs in the low hundreds of dollars annually. For a rental property, the SMLLC segregates the asset from the owner's other holdings and produces Schedule E filings that look identical to a direct-owned rental except for the entity name. For a consultant who has not yet crossed the SE-tax arithmetic threshold where an S election starts to pay for its own payroll overhead, the SMLLC is cheaper to run than anything else that offers a shield at all.

Where the form has gotten meaningfully worse since 2016 is in two dimensions. The CTA reporting obligation is the first federal compliance the SMLLC owner has ever faced simply for existing, and it will generate its own cottage industry of missed deadlines and late penalties. And the single-member liability shield, read honestly, is thinner than the two-member version in Florida and in several jurisdictions that have looked at charging-order exclusivity since Olmstead. Neither of those is a reason to abandon the form. Both are reasons to stop treating it as a set-and-forget decision.

The 2016 advice to form at home unless you have a specific reason to go elsewhere still holds. The 2022 addendum is that, wherever you form, you are now on a federal list as of January 2024, and the paper trail that keeps your veil intact is a file you maintain, not a decision you made once.

Sources

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