Small Business Assistance Office - The Single Member Limited Liability Company (SMLLC) as an Alternative to the Sole Proprietorship - Some Frequently Asked Questions

Sep 19, 2026

Upload by Patrick

Small Business Assistance Office addresses frequently asked questions about forming a Single Member Limited Liability Company (SMLLC) in Minnesota as an alternative to a sole proprietorship. It explains SMLLC ownership by a single member, separate legal entity liability protection, and taxation options including “disregarded entity” treatment for income tax. It also covers owner self-employment status for federal employment and FICA purposes, deductibility of trade or business expenses, election requirements, TIN usage, and limits of liability protection.

LanguageEnglish

CategoryForms

FormatPDF

Pages5

Reading Time2 min

AccessFree to download

Frequently Asked Questions

Liability protection for the owner

Owner tax status and employment/FICA treatment

Deducting trade or business expenses

IRS election and Tax Identification Number (TIN)

Personal liability for employment tax payments

Small Business Assistance Office The Single Member Limited Liability Company (SMLLC) As An Alternative to the Sole Proprietorship Some Frequently Asked Questions There is increasing interest in the Single Member Limited Liability Company (SMLLC) as an alternative to the sole proprietorship for the organization and operation of a small business in Minnesota. ASMLLC is an LLC in which a single individual or other entity (called a “member”) owns all of the LLC ownership interest. A SMLLC is a legal entity separate from its owner and so offers the owner a degree of protection from liability for the acts, debts, and obligations of the SMLLC. The SMLLC also offers the choice of taxation as a corporation or taxation as a “disregarded entity” where the SMLLC is disregarded for income tax purposes and all income flows directly to the owner who reports the income and pays the tax using the owner’s personal income tax return. Anecdotal evidence would indicate that the majority of individuals considering the SMLLC as an alternative to a sole proprietorship choose to be taxed as a disregarded entity.1 In the course of assisting individuals interested in the formation of a SMLLC to be taxed as a disregarded entity, the Minnesota Small Business Assistance Office has encountered a number of frequently asked questions which we answer briefly here. These questions do not address all issues associated with the choice of a SMLLC nor do they address the procedures for SMLLC formation. Further information may be obtained in the Minnesota Small Business Assistance Office publication, A Guide To STARTING A BUSINESS IN MINNESOTA. The Guide is available for viewing and downloading at Publications. 1 The reasons for choosing taxation as a corporation (for example, tax treatment of business losses) are beyond the scope of this publication which is directed toward the SMLLC choosing to be taxed as a disregarded entity. How extensive is the liability protection given the owner of a SMLLC? Unlike a sole proprietorship where the business owner and the business are one and the same, a SMLLCis an entity separate from its owner.2 Minnesota law provides that a member, governor, manager, or agent of a limited liability company is not personally liable for the acts, debts, liabilities, or obligations of the limited liability company.3 It is important to note that the owner will be liable for any personal guarantees or pledges the owner may make to any financial institutions or other lenders to guarantee a loan or other credit facility or financing made to the SMLLC. The owner will be liable for any and all deliberate or negligent personal torts. The owner can also be personally liable for actions (like signing a contract) where it is not clear that the owner is acting on behalf of the SMLLC. All documents of the SMLLC, to include checks, contracts, purchase orders, bids, and the like should bear the name of the business entity with LLC following the name. Likewise, those documents should be clear on their signature lines that the owner isan authorized signer and is signing on behalf of the SMLLC and not in his personal capacity. Minnesota law also provides that the same conditions and circumstances under which creditors can“pierce the corporate veil” of a corporation to reach the assets of an owner also apply to piercing the veil of an LLC.4 Is the owner of a SMLLC an “employee” for purposes of federal employment and Social Security (FICA) taxes? The owner of a SMLLC is self employed for purposes of employment and FICA taxes. Payments to the owner are not classed as “wages” but as “distributions.” The owner is subject to the selfemployment tax equal to the sum of both the employer and employee FICA and Medicare tax. For the year 2020 that total is 15.3 percent of the first $137,000 . 5 2 See Lattanzio v. COMTA, 482 F.3d 137 (2nd Cir. 2007) U.S. v. Hagerman, 545 F.3d 579 (7th Cir. 2007) . 3 Minn. Stat. § 322B.303, subd. 1. 4 Minn.

FAQs

How does liability protection for an SMLLC owner compare with a sole proprietorship?

An SMLLC is a separate legal entity, and Minnesota law generally prevents personal liability for the SMLLC’s acts, debts, liabilities, or obligations. The owner remains liable for personal guarantees, deliberate or negligent personal torts, and for situations where the owner’s role is unclear on signed documents.

Is the SMLLC owner considered an “employee” for federal employment and Social Security (FICA) taxes?

No. The owner is self-employed for employment and FICA tax purposes, and payments are treated as “distributions,” not “wages.” The owner pays self-employment tax, combining both employer and employee portions of FICA and Medicare taxes.

What tax election is needed for an SMLLC to be treated as a disregarded entity, and does it require a TIN?

Only a SMLLC wishing to be taxed as a corporation must file Form 8832; an eligible entity with a single owner is disregarded if no election is filed. If the SMLLC has employees, it obtains its own TIN; if there are no employees, the owner may use a Social Security number or obtain a separate TIN, and SSN may be required for federal tax purposes.

Sep 19, 2026

Upload by Patrick