Single-member owners of disregarded LLCs should receive separate due process notices.

• Author: Fiore, Nicholas J.
• Position: Limited liability companies

A limited liability company (LLC) is a hybrid entity created under state law, with attributes of both a partnership and a corporation. The owners of an LLC are the members, who generally are not liable for the LLC's debts. An LLC may own property in its own name, and members have no interest in such property. The law of most states permits organization of single-member LLCs (SMLLCs).

Regs. Sec. 301.7701-1 et seq. (check-the-box regulations) provides a framework for the Federal tax classification of entities. An LLC's classification will depend on the number of members and any election filed for it. For example, an LLC may be either a multi-member or SMLLC. If it is a multi-member LLC, it could elect treatment as an association taxable as a corporation. If no election is made, Regs. Sec. 301.7701-3(b)(1)(i) provides that the multi-member LLC will be treated as a partnership.

If an LLC is an SMLC, the question is whether it will be treated as an association (taxable as a corporation) or as a disregarded entity. A single-member owner of an LLC could elect to have it classified as an association taxable as a corporation. If no election is made, Regs. Sec. 301.7701-3(b)(1)(ii) provides that the LLC will be disregarded as an entity separate from its owner. A disregarded LLC's "activities are treated in the same manner as a sole proprietorship, branch, or division of the owner."

Because a disregarded LLC is not separate from its owner, the Service may seek to collect the taxes arising from the LLC's business directly from the single-member owner by administrative collection action, including filing a Notice of Federal Tax Lien (NFTL). In pursuing administrative collection action, collection due process (CDP) rights under Secs. 6320 and 6330 must be accorded the single-member-owner taxpayer.

As a general rule, a disregarded SMLLC has no filing obligation; all its activities are reported by the company's sole owner. As an exception, Notice 99-6 permitted a disregarded LLC to separately calculate, report and pay its employment tax obligation for its employees, under its own name and employer identification number (EIN). The notice makes clear that the owner of an SMLLC treated as a disregarded entity for Federal tax purposes is the employer for employment tax liability purposes. Consequently, the owner retains ultimate responsibility for the employment tax obligations incurred for the disregarded entity's employees. Thus, as a disregarded entity, an...