LLC Tax Information: Everything You Need to Know
Understanding LLC tax information is the best way to choose the correct taxation status for your limited liability company. 3 min read
2. Single-Member LLC Taxes
3. Multi-Member LLC Taxes
4. Division of Profits
5. Distributive Share Taxes
6. Corporate Taxation
S Corporation vs. C Corporation
Electing S corporation status is a very popular choice for limited liability companies (LLC). However, before you alter your status, you should learn how standard LLCs and S corporations differ when it comes to taxes.
If you are considering electing S corporation status, your LLC must comply with several IRS rules:
- Your LLC needs to be a domestic entity.
- Your company cannot have over 100 members.
- Shareholders can only be estates, exempt organizations, individuals, or trusts.
The end of your company's fiscal year must be December 31 if you want to be treated as an S corporation. Getting help from a tax professional is the best way to change the tax status of your LLC.
Single-Member LLC Taxes
When an LLC has a single member, the IRS treats it as a sole proprietorship for the purpose of taxation. This means that the LLC is not required to file a return or pay taxes.
The owner of a single-member LLC will report their business's losses and profits on a Schedule C form that will be filed along with the owner's 1040. Since you are the only member of your LLC, you can use the Schedule C form to make business deductions, including travel expenses. Business profits that are still in your bank account at the year's end will be subject to income taxes. The IRS treats single-member LLCs as disregarded entities. Your LLC's income is also subject to self-employment taxes, including Medicare and Social Security.
How you structure your company will directly impact your taxes. With a sole proprietorship, the IRS does not consider you and your company to be legally separate, making you responsible for your business's tax filings and payments.
Multi-Member LLC Taxes
For the purpose of taxation, multi-member LLCs are treated the same as partnerships.
A multi-member LLC, like single-member LLCs, are not required to pay business income taxes. Instead, members of the LLC will use their personal returns to report and pay taxes on their share of company profits. LLC member tax returns should include the Schedule E form. You will use your operating agreement to outline the share of losses and profits of each company member.
Partnerships are required to file Form 1065 with the IRS. This form is considered an informational return. Every partner in a partnership will be provided with a Schedule K-1 form, which will detail the partner's losses and profits. Partners will file their K-1 form with their 1040 return. A tax lawyer can answer any questions you may have about transitioning to an LLC.
Division of Profits
It's common for operating agreements to state that a member's shares will be based on his interest percentage. For instance, if one member owns fifty percent of the company, he will be distributed this same percentage of losses and profits. Special allocation is when you're dividing losses and profits in some way other than ownership percentage.
Distributive Share Taxes
The IRS will also treat members as if they have been distributed all of their distributive shares, regardless of how the shares have actually been distributed. This means that members must pay taxes for their entire distributive share. The effect of this treatment is that LLC members will be subject to income taxes on company profits, even if they've left their share of those profits in the company.
Multi-member LLC must file a 1065 form even though the company does not pay income taxes itself. The 1065 form for LLCs is the same form filed by partnerships. The purpose of this form is to verify that LLC members are correctly reporting their income.
If you expect that you will need to keep profits in your LLC rather than distributing them, electing corporate tax status may be your best option. Filing Form 8832 after checking the box for corporate tax treatment will allow your LLC to be taxed as an S corporation or corporation. Picking S corporation status will allow you to circumvent double taxation by passing losses and profits to the members of your company. If you choose S corporation status, your members will need to file a Schedule K-1 form.
If you need help understanding LLC tax information, you can post your legal need 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.