LLC File: Everything You Need to Know
An LLC file procedure is a simple process and while the LLC itself does not have its own tax classification, it is taxed in the same manner as other entities.3 min read
An LLC file procedure is a simple process. The LLC itself does not have its own tax classification, but rather it is taxed in the same manner as other entities. Your LLC will be taxed as a:
- Sole proprietorship
If you choose to have your LLC taxed as a corporation, you may obtain a C or S corporation classification. If you own a sole LLC, your LLC would be taxed as a sole proprietorship, and multi-member LLCs are taxed as a partnership. Such flexibilities make LLCs appealing to many small business owners, but the process can be confusing for those who are starting a business. It’s also worth understanding the vital differences between the tax classifications, and choosing the right structure could help you reduce self-employment taxes.
LLC Tax Guidelines
Since LLCs are a relatively new creation, the IRS has no official tax classification. Also, there are no LLC tax forms to complete. This does not mean that an LLC is not subject to taxation; it means that LLCs are taxed as though they are a different entity type. LLC members abide by pass-through taxation, where all profits and losses pass from the business to LLC members.
For sole member LLCs, owners must use Schedule C to report on their individual tax returns. The member would then list net losses and profits on the income portion of Form 1040. Since the LLC is disregarded for tax reasons, the LLC would be taxed as a sole proprietorship, otherwise known as a disregarded entity. The entity would only be disregarded for tax reasons, and the LLC would still maintain all liability protections.
For multi-member LLCs, owners would file Form 1065, which is an information-based return that notes all expenses and income of the LLC. The IRS uses Form 1065 to make sure that all member report their profits accurately on their individual tax returns. The LLC also issues Schedule K-1 to all members, which shows the member’s profit share from the LLC.
Note: Your LLC operating agreement should detail all percentage shares and losses of each member.
Members must report all profit shares and losses on Schedule E to individual tax returns. Members should also pay taxes on his or her profit shares, even if they choose to leave a portion of the profits in the business.
LLCs that are taxed as partnerships or sole proprietorships are designated as self-employed when it comes to federal tax reasons. If you work for an employer, the employer pays half of all Medicare and Social Security taxes, and you would pay the remaining half. If you are considered self-employed, however, you must pay all self-employment taxes. For your annual return, you may deduct half of the tax from the income you make, which slightly reduces the self-employment tax balance.
Self-Employment Tax Guidelines
You must submit file Schedule SE (Self-employment Tax) with the tax return to note and determine the self-employment tax balance. Also, self-employed individuals should make estimated payments of the income taxes in quarterly installments throughout the year. Failure to do so may result in interest to the tax balance and other penalties.
Corporate Tax Classification
LLCs may also choose to be taxed as a corporation through the filing of Form 8832 to the IRS. In addition, LLCs may be taxed as an S corp. Corporate taxation can get complicated, and you should consult with an accountant before choosing a corporate tax classification.
You may want to be taxed as a corporation if:
- You want to leave a large amount of money in the business annually to grow a business or other reasons.
- The profits far surpass the amount that employees/owners would make salary-wise, and you would want to reduce a self-employment tax balance.
LLCs taxed as corporations would file a corporate income tax return annually. Shareholders also note dividends and salaries that they would receive on individual tax returns. An LLC taxed as an S-corp adheres to procedures that are similar to a partnership. For instance, the LLC must submit an information-based return and give each member’s Schedule K-1s to each member to note on their individual tax returns.
To find out more about how an LLC file works, post your legal need to our UpCounsel marketplace. UpCounsel’s lawyers will give you sound advice on how to choose the right tax classification for your business. Also, they will guide you in maintaining your LLC or corporation, and they will help you maximize all tax-savings strategies so you can use the extra money to expand your business.