Lending to a Single-Member LLC

When dealing with a single-member limited liability company (LLC), most lenders have questions about the entity’s tax consequences.

Since a single-member LLC has one individual responsible for it, the concern is often justified due to being tied to the owner’s personal financial activity. Thankfully, understanding how this affects the one-person company is easier than it might seem at first.

A single-person LLC can be taxed differently than a multi-member LLC

When it comes to taxation, both single-member and multi-member LLCs can be taxed as corporations on an 1120 or 1120S return. However, the difference comes in other available forms of taxation. While a multi-member LLC can be taxed on a 1065 return as a partnership, a single-member LLC can be taxed on a 1040 return as a sole proprietorship. This means that even though both types of LLCs can be taxed as corporations, a single-member LLC cannot be taxed as a partnership.

The LLC status still provides protection against key tax consequences

Despite presenting the possibility to be taxed as a sole proprietorship, a single-member LLC has its structure working in its favor.

As opposed to typical sole proprietorships where the owner’s personal social security number (SSN) is often used, a single-member LLC has to have an Employer Identification Number (EIN) if it has any employees besides the owner or an excise tax liability. This separates the LLC’s taxes from its owner, even when the company is taxed as a sole proprietorship. Due to this reason, the Internal Revenue Service (IRS) cannot refer to the LLC’s assets to recover the owner’s 1040 federal tax liability.

Practicing caution while funding a one-person entity

While lending to a one-person company may seem riskier than funding a multi-member LLC, these distinctions make it clear that it is not the case.

As long as the single-member LLC is up to date on its own taxation, has its LLC status in place, and has an EIN, you can ensure that it’s safe from its owner’s tax liability. This means that while you can lend to a single-person company, it’s important to practice caution and check related details as much as possible.

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