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Editorial 10 MIN READ

The single-member LLC, five years on

The disregarded entity that the IRS still disregards is now something Treasury wants to know the owner of

The Editors
Staff, Incorporator.org
10 min read Updated
Contents 5 sections
  1. What changed on January 1
  2. The 2021 tax spine
  3. The liability doctrine, largely settled
  4. What to do in the first half of 2021
  5. Sources

he single-member LLC in March 2021 is, for federal income-tax purposes, the same disregarded entity it has been since the check-the-box regulations finalized in 1996. What changed on January 1 is that the owner of every SMLLC in the country became, for a different federal purpose, reportable by name to the Treasury Department.

Five years after the April 2016 piece that set the house view on this form, the spine is unchanged and the perimeter has moved. That is the only way to read the single-member LLC in 2021: a settled tax and liability instrument wrapped in a new federal disclosure regime and a slightly different payroll-and-deduction math.

What changed on January 1

The Corporate Transparency Act became federal law on January 1, 2021, when the Senate voted 81 to 13 to override a presidential veto of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021. The substantive reporting regime sits in sections 6402 and 6403 of Pub. L. 116-283. Section 6403 drops a new section 5336 into Title 31 of the United States Code, slotting beneficial-ownership reporting into the Bank Secrecy Act architecture. We walked through the statute in the January piece on the CTA; the point here is what it does to single-member LLC practice.

The mechanics, as written, are unkind to the SMLLC default. A "reporting company" under 31 USC § 5336(a)(11)(A) is any corporation, LLC, or similar entity created by filing with a secretary of state or similar office, or formed under the law of a foreign country and registered to do business in a state. The 23 exemptions at § 5336(a)(11)(B) are drawn for already-regulated or already-disclosed entities: SEC registrants, banks, registered investment advisers, tax exempts, insurance companies, entities with more than 20 full-time employees and more than $5 million in gross receipts and a physical U.S. office. A single-member LLC formed to hold a duplex or to run a consulting practice meets none of those. Nearly every SMLLC in the country is a reporting company, and its sole member is, by definition under § 5336(a)(3), the beneficial owner.

Treasury owes a proposed rule and then a final one. Section 6403(b) directs the Secretary to issue implementing regulations within a year of enactment, and the reporting obligation attaches on the effective date of those final regulations. FinCEN opened an advance notice of proposed rulemaking on April 5 of this year, which means the comment period is running now and the operative deadlines, filing formats, and safe harbors are still being drafted. Nothing a founder forming in the next sixty days should do changes for 2021. Everything about formation in 2022 will be different: the name, date of birth, residential or business street address, and unique identifying number from a passport or state ID of each beneficial owner will be filed with FinCEN at formation, and willful failure carries a civil penalty of up to $500 per day and criminal penalties under § 5336(h).

For an SMLLC, the structural consequence is that the privacy pitch of Wyoming and New Mexico, which has driven a meaningful share of out-of-state formations for the last decade, loses most of its federal-level value once the final rule prints. The state registry will still be clean; the federal one will not be. Asset-protection planning that assumed a quiet chain of single-member holdings under nominee agents will need to be rewritten, and the rewriting is for the FinCEN regime rather than the state-formation regime.

The 2021 tax spine

For federal income-tax purposes, nothing about the SMLLC default has moved. Treas. Reg. § 301.7701-3, the check-the-box regulation, still treats an eligible domestic entity with a single owner as a disregarded entity unless the owner affirmatively elects corporate treatment on Form 8832. The owner reports business activity on Schedule C, E, or F as appropriate, picks up a 199A deduction where the regulations allow, and pays self-employment tax at the IRC § 1401 rates.

Three 2021 numbers matter.

The Social Security Administration set the 2021 contribution and benefit base at $142,800, up from $137,700 in 2020. The 12.4% Social Security portion of self-employment tax under IRC § 1401(a) stops at that ceiling. The 2.9% Medicare portion continues without cap, and the 0.9% Additional Medicare Tax under IRC § 1401(b)(2) begins at $200,000 for single filers and $250,000 for joint filers, thresholds that are not indexed to inflation and have not moved since the Affordable Care Act put them in place.

Rev. Proc. 2020-45 sets the 2021 inflation-adjusted Section 199A threshold amounts at $164,900 for single and head-of-household filers and $329,800 for joint filers. Below those numbers, a disregarded SMLLC whose owner has qualified business income gets a 20% deduction against that income, subject only to the overall taxable-income cap and regardless of whether the trade or business is a specified service trade or business. Above the threshold and through the phase-in range ($50,000 for single, $100,000 for joint), the W-2 wage and UBIA limits kick in and the SSTB phase-out begins. Fully above the phase-in, SSTB income gets no 199A deduction at all, and non-SSTB income is limited to the greater of 50% of W-2 wages or 25% of W-2 wages plus 2.5% of UBIA of qualified property.

The $142,800 wage base and the $164,900 single-filer 199A threshold are the two numbers a first-time SMLLC owner in 2021 should write down. They govern every planning conversation that matters this year.

The final 199A regulations in T.D. 9847, published February 8, 2019, have settled into practice. Treas. Reg. § 1.199A-1 through § 1.199A-6 are the operative rules, with the aggregation mechanics at § 1.199A-4 and the SSTB definitions at § 1.199A-5. The de minimis SSTB rule at § 1.199A-5(c)(1), the three-year employee-to-contractor presumption at § 1.199A-5(d)(3), and the aggregation statement requirement at § 1.199A-4(c)(2) are now what preparers work against. We covered the package when it printed in the August 2019 field report; what happens to it going forward will be driven by IRS rulings and Treasury notices rather than fresh regulations, and the first two filing seasons under the final rule (2019 and 2020 returns) have produced remarkably few surprises.

For an SMLLC owner in 2021 the operative question is still the S-corp election, not the 199A boundary. Below the threshold, a Form 2553 election that runs a reasonable W-2 salary and distributes the rest saves payroll tax on the distributive share and does not cost 199A deduction dollars, because below the threshold the full 20% runs against QBI regardless of W-2 wages paid. Above the threshold, wages reduce QBI and the tradeoff gets harder; a non-SSTB owner may still come out ahead if the business pays enough wages to clear the W-2 limitation, and an SSTB owner above the full phase-out gets no deduction either way. The crossover calculus we described in the December 2017 revisit, roughly $40,000 to $50,000 of net profit for the payroll-tax math to pencil, still holds for the sub-threshold case and gets more sensitive to facts above it.

The liability doctrine, largely settled

The charging-order map has not meaningfully moved since the 2019 report. Florida's carve-out at Fla. Stat. § 605.0503(4), enacted after Olmstead v. FTC, 44 So. 3d 76 (Fla. 2010), remains the anchor for states skeptical of single-member shields. Wyo. Stat. § 17-29-503, 6 Del. C. § 18-703, and Tex. Bus. Orgs. Code § 101.112 remain the strong-charging-order poles, all three making the charging order the exclusive remedy without regard to member count. Nevada sits with them. The advice for 2021 is the advice we gave in 2017 and again in 2019: if asset protection is doing any meaningful work in the decision, form in a strong-charging-order state, foreign-qualify honestly into the operating state, and do not assume home-state single-member charging orders hold up under pressure.

On piercing, the doctrine has stabilized around the facts courts keep finding dispositive. Commingling, undercapitalization, failure to observe the minimal formalities the statute requires, and conduct that treats the entity as a personal wallet are still what pierces the veil. The reverse-piercing line that Curci Investments, LLC v. Baldwin, 14 Cal. App. 5th 214 (Cal. Ct. App. 2017), opened in California and that Sky Cable, LLC v. DIRECTV, Inc., 886 F.3d 375 (4th Cir. 2018), extended under Delaware law is now cited routinely in federal decisions outside either jurisdiction. The Delaware Supreme Court has not spoken on reverse piercing directly, and the Chancery posture from Spring Real Estate, LLC v. Echo/RT Holdings, LLC, C.A. No. 7994-VCN (Del. Ch. Feb. 18, 2016), remains the last formal statement. In practice, federal courts applying Delaware law have treated Sky Cable as the best read, and SMLLC structures planned on the theory that Delaware rejects reverse piercing are planned on a stale map.

The behavioral rule the 2016 piece stated and every subsequent revisit repeated has not changed. The veil, in either direction, is behavioral. Operating agreements that exist, capital contributions that are documented, distributions that are accounted for, and bank accounts that never pay personal bills are the facts that survive a piercing motion. The CTA reporting overlay does not affect that. A beneficial-ownership filing to FinCEN is not an admission that the entity is a sham; a careless comingling pattern still is.

What to do in the first half of 2021

The prescription for a founder reading this in March has the same spine as every prior year and two new items.

Form a single-member LLC in the operating state unless there is a specific, dollar-weighted reason to charter elsewhere. Write an operating agreement that recites the LLC is a separate legal person and that capital contributions, distributions, and management decisions will be documented. Get an EIN. Open a bank account in the LLC's name and run every business dollar through it. File Form 2553 to elect S-corp treatment once net profit crosses the payroll-tax crossover and, if the owner's taxable income is approaching $164,900 or $329,800, run the 199A math both ways before committing. If the 2553 is being filed late, Rev. Proc. 2013-30 is still the route to retroactive relief.

The new items are CTA-shaped. First, maintain a current file for each beneficial owner containing the information 31 USC § 5336(b)(2) enumerates: full legal name, date of birth, current residential or business street address, and a unique identifying number from a non-expired passport, state driver's license, or other acceptable government-issued ID, together with a legible image of that document. When FinCEN's final rule prints, the filing will want exactly those fields, and nominee structures that were the point of some SMLLC formations will have to accommodate them. Second, do not form a new SMLLC this year expecting the state registry's privacy to carry forward federally after the rule takes effect; form on the assumption that the beneficial owner will be named to Treasury in 2022 or 2023 and structure privacy arrangements, if any are still warranted, around that assumption.

One observation worth closing on. The SMLLC in 2021 is the most widely used American business entity because the check-the-box regime made it cheap to form and cheap to run, state statutes made it a defensible liability shield, and the Section 199A deduction made the pass-through math competitive with C-corp treatment for most small operators. None of that has moved. What has moved is the federal disclosure perimeter: the entity Treasury would not look at for income-tax purposes is now the entity Treasury wants a name for under Title 31. The form still works. The quiet is ending.

Sources

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