Limited Liability Companies (LLC's)
The Single Member LLC
For income tax purposes, the IRS looks at the single member LLC as a "disregarded entity" unless the LLC files an election to be taxed as a corporation.
What this means is that, as far as IRS is concerned, the single owner of the LLC is a sole proprietor and will report income and expenses on Schedule C.
Under state law, the LLC is a separate entity, similar to a corporation. Like a shareholder in a corporation, the LLC's owner has the protection of limited liability. What this means is that if someone has a claim against the LLC -- say the LLC has borrowed money and can't pay it back, or one of the LLC's customers is unhappy with the product they bought and they sue the LLC -- they can look only to the LLC's assets for satisfaction of their claim. Thus the owner of the LLC is at risk only for the money and other assets he or she has transferred to the LLC. (Note: when LLC's borrow money or establish a line of credit, the lender often requires a personal guarantee by the LLC' owner, so with respect to that particular debt, the owner does not enjoy limited liability).
This idea of being one type of critter at the state level and another type for federal tax purposes can be very confusing. Just remember that the single member LLC is a separate entity for all purposes except when it comes time to file income taxes.
Continued ... LLC's with more than one member