Can an athlete put deals through an LLC, and what does it change?

Short version: Yes. A state creates the LLC, and a deal can be signed and paid in its name. For federal tax, a one-owner LLC is ignored unless it elects otherwise, so the same Schedule C and self-employment tax apply.

"Put it through an LLC" is one of the first things athletes hear once the money starts. It sounds like it changes everything. The IRS's own pages say what it changes for tax, and it's less than most people expect.

Here's each piece, in the IRS's words, plus what one state charges to make one.

Who makes an LLC

Not the IRS. Its page on LLCs opens with one line: "A Limited Liability Company (LLC) is an entity created by state statute." You form it with your state, under your state's rules and fees.

Pennsylvania is one example. Its Department of State says an LLC "is formed by filing a Certificate of Organization," with a docketing statement. The same page says the certificate "is not required by law to be prepared by an attorney."

The fee is on the department's own fee page: $125 for a domestic LLC's Certificate of Organization, and $7 for a for-profit entity's annual report. Every other state posts its own numbers, and they differ.

The "limited liability" part is state law too, and it sits outside the IRS pages this post is built on. We left it out rather than guess.

What the IRS does with a one-owner LLC

The federal rule is short. Unless it elects otherwise, a domestic LLC with one owner is "disregarded as an entity separate from its owner." Disregarded means the IRS looks straight through it to you.

The IRS's page on single-member LLCs says what that means in practice. The LLC's activities "should be reflected on its owner's federal tax return." For an individual, that's generally Schedule C, the same form a sole proprietor uses.

Then the line most people never hear. An individual who owns a single-member LLC running a trade or business is subject to self-employment tax "in the same manner as a sole proprietorship."

Forming a one-owner LLC doesn't move a dollar of self-employment tax by itself.

So the $400 line and the 15.3% rate from our post on when a deal makes you self-employed work the same way with or without one. Honestly, that's the line that surprised us most.

There's one place the IRS does treat it as separate. For employment tax and certain excise taxes, the page says an LLC with one member "is still considered a separate entity." If the LLC pays wages, it reports them under its own name and EIN.

The name on the paperwork

This is where a disregarded LLC shows up. The Form W-9 a brand asks for has two name lines. For a disregarded entity, the owner's name goes on line 1 and the LLC's name on line 2.

The number is the owner's too. The IRS says a W-9 for a disregarded LLC owned by an individual "should provide the owner's SSN or EIN, not the LLC's EIN." The W-9's own table lists the owner as the person whose number goes on it.

An EIN is the IRS's number for a business. A single-member LLC with no employees and no excise taxes "does not need an EIN," the IRS says. It can get one to open a bank account, or where state tax law asks for one.

The contract changes too. A deal names whoever signs it. If the LLC signs, the LLC is the party on the page.

Two owners: a partnership

Add a second owner, a parent for example, and the default flips. The same federal rule makes a domestic LLC with two or more members "a partnership," unless it elects to be taxed as a corporation.

The IRS's LLC page says the same thing in plain terms. An LLC "with at least two members is classified as a partnership for federal income tax purposes." The default changes again if it drops back to one member.

Choosing to be taxed as a corporation

This is where the tax treatment really changes, and it takes a form. Form 8832, the Entity Classification Election, is how an LLC asks to be taxed as a corporation instead of under the default.

The form's instructions set the timing. An election "can take effect no more than 75 days prior to the date the election is filed, nor can it take effect later than 12 months after the date on which the election is filed."

They also set a lock. Once an entity elects to change its classification, it "generally cannot change its classification by election again during the 60 months after the effective date." That's five years.

The lock doesn't apply to a first election made by a new entity and effective the day it was formed.

A new LLC that's happy with the default doesn't file Form 8832 at all. The instructions say so directly.

S corporation status is a separate form. The IRS says Form 2553 is filed by "a corporation or other entity eligible to be treated as a corporation" to elect to be an S corporation.

An S corporation comes with a rule of its own. The IRS says it "must pay reasonable compensation to a shareholder-employee" for their services before it makes other payouts to them. That compensation is paid as wages.

It also changes the forms a brand sends. The 1099 instructions say a 1099-NEC generally isn't required for payments to a corporation, "including an LLC," that is treated as a C or S corporation.

What it adds up to

An athlete can put deals through an LLC. With one owner and no election, the federal tax picture stays the same: Schedule C, self-employment tax, your own number on the W-9. The name on the contract and the second line of the W-9 change.

The bigger changes come with a second owner, which makes it a partnership, or with an election to be taxed as a corporation or S corporation. A change made by election generally stays for 60 months.

What any of this means for your own taxes depends on your situation: your income, your state, your costs and who else is involved. The figures here are the rules as the IRS and Pennsylvania state them today. Every source is linked at the bottom.

Questions people ask

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