1. Tax Treatment of an LLC
2. Single-Member LLC Forms
3. Multi-Member LLC Forms
4. Default Designations

The LLC tax form that you will use for your company depends on the tax treatment you have elected. 

Tax Treatment of an LLC

Limited liability companies (LLC) with one member are called single-member LLCs, and these entities are disregarded by the IRS when it comes to federal income taxes. Instead of the LLC being taxed directly, the sole member will use his personal return to report company expenses and income. Under tax rules, members of a multi-member LLC are treated like partners, which means they are passed profits and losses instead of the LLC handling these issues directly.

One of the most difficult issues for the members of an LLC is whether their earnings from the company are subject to self-employment taxes. Generally, if a member actively participates in the LLC, he is required to pay self-employment taxes.

However, if an LLC member does not have an active part in operating the company, he will be treated as a limited partner, meaning he will only need to pay self-employment taxes or the compensation he receives for services and not for the profits that have been distributed. Unfortunately, there are no clear-cut laws on how inactive LLC members can qualify for this tax treatment.

The IRS has proposed rules to help clarify this issue. These rules state LLC members should pay self-employment taxes on distributed profits if they:

  • Are involved with the LLC for more than 500 hours a year
  • Hold liability for debts of the company
  • Have the power to sign contracts for the LLC

These rules would also require LLC members in certain fields to pay self-employment taxes:

  • Accounting
  • Architecture
  • Consulting
  • Engineering
  • Health
  • Law

While these proposed rules have not been formally adopted, the IRS won't take any action against LLCs that choose to follow these rules. LLCs are also subject to state taxes, which can differ depending on the state. LLCs in California, for example, must pay both an $800 annual tax and a fee that is based on the company's income if it earns more than $250,000.

Many small businesses choose not to form a California LLC because of the $800 annual fee, particularly if the liability protections do not make up for the cost of the tax. If you want to know what state taxes may apply to your limited liability company, you should check with your state's Department of Revenue. 

Single-Member LLC Forms

Single-member LLCs have only one member. When you're operating a single-member LLC, your company will be taxed as a sole proprietorship, which means you will use your personal 1040 form to report losses and profits. However, if the sole LLC member is a corporation, Form 1120 or 1120S will be used to report expenses and income.

Single-member LLCs are not allowed to submit a partnership return. In some states, LLCs that have been formed by a husband and wife can choose to be treated as a single-member LLC for federal taxes. California is one state that allows for this election. 

Multi-Member LLC Forms

Multi-member LLCs have more than one member, and these companies are automatically treated as partnerships for taxes. This means that all the company's losses and profits will be passed to the company's owners and then described on their individual federal returns.

In most cases, multi-member LLCs will file Form 1065, which is a partnership return. Multi-member LLCs that would prefer to be taxed as a corporation can file Form 8832 with the IRS. However, once your LLC has elected corporate tax status, you must wait five years to change your election. LLCs that wish to file as a partnership are not required to File Form 8832.

LLCs that decide to be treated as a C corporation will use Form 8832 to report profits and losses. LLCs that have chosen S corporation tax treatment will report profits and losses on Form 2553. 

Default Designations

Once your LLC has been formed, you will be treated automatically as a partnership by the IRS for the purposes of income taxes. If you are the only member of your LLC, then the profits of your business will be taxed the same as if you were a sole proprietorship. As you might expect, corporations and partnerships must follow different rules for filing taxes.

If you need help preparing your LLC tax form, you can post your legal needs on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.