Single-Member LLC on Schedule C
Have you ever seen a Schedule C with a name like “Bill Smith Consulting, LLC?” Are the income and expenses as shown on this Schedule C real cash flow?
Absolutely, these are real cash flow. What you’re looking at is a “single-member LLC” which is basically a regular Schedule C with an LLC shell wrapped around it for the liability protection of the Schedule C owner. In the example above, Bill Smith established an LLC to conduct his consulting business as a sole proprietorship. Because Bill is the sole owner of the LLC, the LLC is a “disregarded entity” where the LLC’s income and expenses will be reported on its owners tax return. The income from Bill Smith Consulting, LLC will be reported directly on the Schedule C of Bill Smith’s individual tax return (Form 1040).
Single-Member LLCs
Single-member LLCs allow the owner of a Schedule C – Sole Proprietorship, a Schedule E – Rental, or a Schedule F – Farm to wrap a protective shell around the entity in the form of an LLC. That is the only purpose of the single-member LLC, liability protection. It doesn’t change the fact that tax-wise, these are still a Schedule C, a Schedule E – Rental, or a Schedule F – Farm. So the amounts reported on these forms are real cash flow (excepting things like depreciation, amortization, etc.) and each should be cash flowed as a Schedule C, a Schedule E, or a Schedule F just like you would if they weren’t a single-member LLC.
Note, if the LLC had multiple owners or elected to be treated as a corporation, the LLC would file a separate business tax return such as a Form 1065, Form 1120-S, or Form 1120.
KEY TAKEAWAY FOR LENDERS
A single-member LLC reported on Schedule C is generally treated as a disregarded entity for tax purposes, meaning the business activity flows directly to the borrower’s individual return. Lenders should evaluate the underlying business income, expenses, and cash flow trends rather than assuming the LLC structure itself changes the borrower’s repayment capacity.
Questions
If you have similar questions, please call our team of experts through the Bukers Hotline at 503-520-1303. You may also submit a question online and we will quickly get back to you.