Does a Single Member LLC Need a Schedule K-1?

The tax treatment of a single-member limited liability company (SMLLC) is a frequent point of confusion for new business owners. By default, an SMLLC does not issue or use a Schedule K-1, a tax form associated with partnerships and S corporations. The relationship between an SMLLC and a Schedule K-1 only exists under specific circumstances.

Default Tax Treatment of a Single-Member LLC

By default, the Internal Revenue Service (IRS) treats a single-member LLC as a “disregarded entity” for federal income tax purposes. This means the business’s financial activities are reported directly on the owner’s personal tax return, just as they would be for a sole proprietorship.

All business income, expenses, gains, and losses are reported on Schedule C, “Profit or Loss from Business,” which is filed with the owner’s Form 1040. The net profit or loss from Schedule C then flows to Schedule 1 of the Form 1040 and is included with the owner’s other personal income. In this standard scenario, there is no requirement to generate or file a Schedule K-1, as all tax items are reported on Schedule C.

Electing Alternative Tax Status

An SMLLC owner can change this default tax treatment by electing to be taxed as an S corporation, a decision often motivated by potential self-employment tax savings. While a disregarded entity’s entire net profit is subject to self-employment taxes (Social Security and Medicare), an S corporation owner pays these taxes only on a “reasonable salary” they receive from the business. Any remaining profits can be distributed as dividends, which are not subject to self-employment tax.

To make this change, the owner must file Form 2553, “Election by a Small Business Corporation,” with the IRS. The deadline for filing Form 2553 is no later than two months and 15 days after the beginning of the tax year the election is to take effect.

It is also possible for an SMLLC to elect to be taxed as a C corporation by filing Form 8832, “Entity Classification Election.” This choice is less common for single owners and results in a different set of tax forms and potential double taxation, where the corporation pays tax on its income and the owner pays tax on dividends. This election does not involve a Schedule K-1 for the owner.

Issuing a Schedule K-1 as an S Corporation

Once an SMLLC has elected to be taxed as an S corporation, it is no longer a disregarded entity and must file its own informational tax return, Form 1120-S. This return reports the company’s annual financial activities. The due date for Form 1120-S is the 15th day of the third month after the end of the tax year, which is March 15 for calendar-year businesses.

From the information on Form 1120-S, the S corporation prepares a Schedule K-1 for its owner. Since there is only one owner, this K-1 will report 100% of the corporation’s financial items. This includes ordinary business income or loss and any distributions the owner received from the corporation during the year.

The owner uses the figures from the Schedule K-1 to complete their personal Form 1040, reporting the income or loss on Schedule E. This process ensures that the S corporation’s profits and losses are “passed through” to the owner and taxed at their individual income tax rate, while the S corporation itself does not pay federal income tax.

When an SMLLC Receives a Schedule K-1

An SMLLC, as a legal entity, can own an interest in another business, such as a partnership or another S corporation. In this situation, the SMLLC itself becomes a partner or shareholder and would receive a Schedule K-1 from that other entity. This K-1 reports the SMLLC’s share of that business’s income, deductions, and credits.

How this received K-1 is handled depends on the SMLLC’s own tax status. If the SMLLC is a disregarded entity, the income or loss reported on the K-1 it receives flows through to the owner. The owner reports these items on their personal tax return, on Schedule E, as if they had received the K-1 directly.

If the SMLLC has elected to be taxed as an S corporation, the process has an additional step. The income or loss from the K-1 it receives from the other partnership or S corp would first be reported on the SMLLC’s own Form 1120-S tax return. This income is then combined with the SMLLC’s other business activities, and the total net result is passed through to the owner on the Schedule K-1 that the SMLLC issues to them.