State Taxation of Single Member Limited Liability Companies

As the popularity of single-member limited liability companies (SMLLCs) continues to grow due to their simplicity and flexibility, it is important to evaluate not only the federal tax implications but the state tax implications as well.  By default, the IRS treats an SMLLC as disregarded from its owner and requires the SMLLC’s activity be reported as part of its owner’s income tax return. Alternatively, the SMLLC may elect to be taxed as a C corporation, separate and apart from its owner, in which case it would file and report its activity on a stand-alone Form 1120.

While most states conform to the federal treatment of SMLLCs, there are a few potential pitfalls for taxpayers to consider.  In some instances, the SMLLC may be required to file on a standalone basis or may even be subject to additional taxes and fees only imposed on SMLLCs. When making these decisions, it is important taxpayers evaluate not only the potential state tax consequences but their ability to gather and comply data on a granular basis.

Income tax: While most states will conform to the federal treatment and impose income taxes on the SMLLC’s profits through the owner’s tax return, there are a few states (like Tennessee) that may subject a SMLLC to corporate income taxes on its standalone activity, regardless of federal classification.

Gross receipts taxes: Some states impose a gross receipts tax instead of (or in an addition to) an income tax. Gross receipts taxes are generally imposed on total revenue with little to no deductions for expenses, and as a result, a taxpayer may still owe tax in a year in which it has a taxable loss. For example, California imposes a gross receipts tax on LLCs (regarded and disregarded) that ranges from $800-$12,590 annually.

Gross receipts taxes are easy to overlook and often result in unforeseen complexity and expense, especially since they may be imposed on both the regarded or disregarded level. In a multitiered structure this creates even more of a compliance burden on taxpayers.

Franchise tax: Many states impose franchise tax on entities for the privilege of being formed and/or doing business in their state. Franchise taxes are often imposed as a flat fee or a percentage of capital and like gross receipts taxes may be imposed on either the regarded or disregarded entity regardless of income.

Sales and use tax: Each state has unique regulations regarding which items and services are taxable and the applicable sales and use tax rates. If the SMLLC sells goods or services which are subject to sales tax, it must comply with the state and local sales tax regulations where it has sales tax nexus. Additionally, if the company purchases goods for use in the business without paying sales tax at the time of purchase, it may need to self-assess and pay use tax. In most states, the filing requirement is imposed on the SMLLC, regardless of its status for federal income tax purposes. As such, a taxpayer may report sales under a different filing entity for sales tax purposes than it does for income tax purposes.

Annual fees: Some states (like New York) may require annual report filings and fees to maintain the LLC’s status. These reports and fees can vary widely by state, ranging from minimal fees to substantial annual filings.

Given the proliferation of SMLLCs, it’s important to understand the unique tax rules of each state as they can vary significantly. Our tax professionals are here to help you navigate the specific obligations in the states where you operate or are otherwise subject to tax. Contact us today.

Authored by LeAnn Ta

©2025