| To understand the exception, we need to step back in | | | | states. A majority of the laws even allowed one |
| time. | | | | person to form the entity. This caused immediate |
| To the surprise of many, the limited liability company is | | | | problems when most of these single owner LLCs filed |
| a relatively new form of business. It was created out | | | | partnership tax returns. |
| of the blue by Wyoming in 1979. While the politicians | | | | A partnership is a business venture between two or |
| indicated they were trying to be business friendly, they | | | | more people. This is a basic legal axiom that has been |
| were really trying to find a way to generate more tax | | | | around forever. It is also imbedded in the tax code. |
| revenues. What better way than to create a new, | | | | You can probably guess the problem. How could a |
| flexible entity that was perfect for small businesses? | | | | single owner LLC file taxes as a partnership. There is |
| Well, there is little disputing they stumbled onto | | | | only one person! |
| something, but there was one hitch. | | | | After some debate, the IRS made its decision. A single |
| From 1979 to the late 80s, the LLC more or less went | | | | owner LLC is to be treated like a sole proprietorship |
| unnoticed. Why? The IRS took a long time in figuring | | | | for tax purposes. You are probably wondering why |
| out how it would be taxed. Would it be taxed like a | | | | you should care? Well, the ruling means that you have |
| corporation or like a partnership? Should an entire new | | | | to pay the 15.2 percent self-employment tax if you are |
| section of tax code be created for it? The IRS never | | | | the proud owner of a single owner LLC. Most people |
| really came up with a good answer, so they let people | | | | don’t know this when they decide to form the |
| select if they wanted to be taxed as a corp or | | | | entity and they get a very nasty surprise when it is |
| partnership. Most picked partnership and everything | | | | time to pay Uncle Sam. |
| was fine. | | | | If you want to form a single owner LLC, there is |
| States are jealous of each other. When the IRS finally | | | | nothing wrong with that. Just make sure you |
| figured out how it would tax the limited liability | | | | understand self-employment tax will be due and you |
| company, all the other states immediately started | | | | have the money to pay it. |
| passing laws that allowed LLCs to be formed in their | | | | |