Single Member LLC is not an Individual
I probably get at least two or three small partnerships each year that file their tax returns late due to various reasons. The penalty for filing a partnership tax return late can get very steep very fast. It is about $200 per month per partner that the return is late up to a maximum of 12 months.
For example, assume you have a partnership with 5 partners and they are five months late in filing the return. The penalty in this case is almost $5,000.
A way to abate the penalty is to be a qualified small partnership. This involves having 10 or fewer individual partners who all timely report the partnership income on their tax return. A recent ruling from the IRS indicated that a single member LLC is not an “individual”. Normally, a single member LLC is ignored for income tax purposes and you would assume since it is ignored, that the “individual” would count in this case. However, the IRS ruled otherwise.
Therefore, if you own a partnership interest via a single-member LLC make sure to file the tax return timely. Otherwise, it can cost you and your partners some money.