LLC Tax Options
Options for LLC Income Taxes
What is an LLC?
A Limited Liability Company (LLC) is a relatively new form of business entity, having been recognized by the IRS only since 1980. The LLC combines the ease of startup and operation of a sole proprietorship or partnership with the liability protection of a corporation. Because the IRS doesn't have a tax classification for LLC's, it chose to use existing tax classifications for this entity.
How Does a Single-owner LLC Pay Taxes?
Single-owner LLC Taxes. Thus, an LLC with a single owner (called a "member") is taxed in the same way as a single owner business - a sole proprietor. Like the sole proprietor business, the single-member LLC files its tax return on Schedule C. The profit or loss from the Schedule C is included with the owner's personal tax return. The owner also must pay self-employment tax (Social Security/Medicare) on the income from the LLC.
Read more about the Single-member LLC.
How Does a Multiple-owner LLC Pay Taxes?
Multiple-owner LLC Taxes. An LLC with more than one member (owner) pays taxes as a partnership. to file partnership taxes, the partnership files an information return on Form 1065 showing the total profit/loss from the partnership. Each partner receives a tax form (Schedule K-1) showing his or her portion of the partnership profit or loss. This Schedule K-1 income/loss is included with the owner's personal tax return.
Read more about how a partnership pays income taxes.
Income Taxes for LLC's Taxed as Corporations or S Corporations
Now comes the complication: An LLC has two other options for paying income taxes - either as a corporation or an S corporation.
LLC paying taxes as a corporation. An LLC can pay taxes as a corporation. The business must file IRS Form 8832. Read more about filing an entity classification election on Form 8832.
LLC paying taxes as an S corporation. An LLC can pay taxes as an S corporation. The benefit of filing as an S corporation rather than a corporation is that the S corporation owners can report their business income/losses on their personal tax returns and they do not incur double taxation. S corporation owners file a Schedule K-1, which is similar to the Schedule K-1 filed by LLC members.
Understanding the Difference Between an S Corp and an LLC
Before you consider changing your LLC's tax status to that of an S corporation, read about the tax differences between an S corporation and an LLC.
To change tax status to that of an S corporation, the LLC must meet the IRS requirements for S corporations, including (a) it must be a "domestic entity eligible to be treated as a corporation" (that is, an LLC), (b) it can have no more than 100 shareholders (members, in the case of an LLC), and (c) its only shareholders are individuals, estates, exempt organizations, or trusts. The entity must also have a December 31 fiscal year-end.
An LLC may file an elect to be treated as an S corporation by filing an election form 2553.
Any filing to change LLC tax status to that of a corporation or S corporation should be done with the assistance and advice of a tax advisor.
Disclaimer: The information in this article and on this site is intended to be general, to provide you with the background you need for discussion with your tax advisor. The author is not a CPA or attorney and this information is not intended to be tax or legal advice. Every situation is different, state tax laws vary, and tax laws keep changing.