Client Alert

Owners of single-member limited liability companies should be aware of a change in federal tax law that could affect the tax status of such companies.

Under current law, a single-member limited liability company (“SMLLC”) that has not “checked the box” to elect to be treated as a corporation for federal tax purposes is disregarded as a separate entity for tax purposes. Instead, its single owner is treated as directly owning all of the assets and liabilities of the SMLLC, and is responsible for reporting and paying tax on any income earned by the SMLLC. However, with respect to salary and wages paid by a disregarded SMLLC to its employees, the SMLLC can separately calculate, report and pay any employment tax obligations under its own name and taxpayer identification number despite the fact that it is otherwise disregarded for federal tax purposes. Alternatively, the single owner of the SMLLC can report and pay under its name and taxpayer identification number the employment taxes attributable to the payment of employee compensation by the SMLLC. Starting next year, that is no longer the case.

On January 1, 2009, Treasury Regulation Section 301.7701-2(c)(iv) becomes effective and the current rule becomes obsolete. This regulation treats an otherwise disregarded SMLLC as separate from its single owner for purposes of employment tax liabilities arising with respect to wages paid on or after January 1, 2009. According to the IRS Chief Counsel’s Office, the effect of this change is as follows:

• A disregarded LLC is taxed as a corporation for employment tax purposes and many of the issues surrounding the collection of a tax liability from a disregarded LLC are eliminated. Collection against the LLC may be pursued as if it were a corporation; if an LLC transfers its assets to another entity, successor liability may apply under the relevant state law.

The result of this change in the treatment of an SMLLC that is otherwise a disregarded entity for tax purposes is that if it has employees, it will now have to report and pay federal employment taxes under its own name and have its own taxpayer identification number. If such an SMLLC does not currently have a taxpayer identification number, it should obtain one before the end of this year. Generally, a taxpayer identification number can be quickly obtained online through the IRS website.

Our tax attorneys regularly provide advice on federal employment tax matters, as well as other federal and state tax issues. If you have any questions regarding this new law, or need assistance complying with its requirements, please contact the Womble Carlyle attorney with whom you usually work or one of Womble Carlyle’s Tax lawyers.