LLC Taxation: Everything You Need to Know
A limited liability company “LLC” taxation is not considered a separate tax entity by the Internal Revenue Service11 min read updated on January 01, 2024
What is a Montana LLC?
A Montana LLC (“Limited Liability Company”) is a form of business structure that can be registered in Montana State.
Distinct from a corporation or S-corporation small business, a LLC is normally a single-member LLC sole proprietorship, or a multi-member LLC partnership. Registration of a business as an LLC in Montana entitles an owner to the status of a legitimate business, and “pass-through” tax filing with the federal Internal Revenue Service. The following are the steps to forming a LLC in Montana:
Choose a Name for Your LLC
Under Montana law, a registered LLC must contain the phase "Limited Liability Company," “Limited Company,” or the acronyms "LLC," “L.L.C.,” or “LC”. To register as business as a LLC, a fictitious name must be distinguishable from the names of existing registered business entities on file with the Montana Secretary of State. A Montana LLC is created by filing Articles of Organization with the Montana Secretary of State.
Appoint a Registered Agent
Registration of an LLC requires a registered agent residing or operating as a business in Montana. Businesses holding LLC or other registered status outside the state are required to file with Montana Secretary of State to conduct business in the state. Existing corporations can file the LLC without a registered agent by downloading the application for submitting Articles of Organization at the Montana SOS.mt website. Processing of the LLC registration should be accompanied by a payment forwarding to the MT SOS for the $70 filing fee.
Prepare an Operating Agreement
An LLC operating agreement is not required criterion of registration in Montana, but is highly advisable for the formation of businesses with more than one member. An operating agreement outlines the LLC structure, owner(s), management, rules to distribution, including proportional distribution to individual members, and tax reporting status of an entity.
Comply with Other Tax and Regulatory Requirements
Depending on county and municipal jurisdiction where a business will be maintained, as well as type of operation, additional tax and regulatory requirements may apply to an LLC. It is important to note, that some Montana LLC businesses are also subject to mandated permit authorization for operation. Permits are generally granted by county or city government offices, and should be applied for directly.
File Annual Reports
Montana Secretary of State requirements to LLC standing include filing an Annual Report with the administration.
Foreign LLCs Doing Business in Montana
Under Montana law, a foreign (out-of-state) LLC must register with the Secretary of State to conduct business within the state.
Why Register a Montana LLC?
There are both the legal and marketplace considerations to filing for a LLC business in Montana. If a business desires to do business in the state, filing for a LLC is an expedient alternative to filing for Corporation status. Expedited 1-3 day processing of expedited LLC service is a $20 fee, or 1 hour processing, $100 fee.
Montana LLC Registration is a Benefit
The benefit to registering a business as a LLC in Montana, is that risks associated with debt or legal liabilities resulting from a start-up venture should it fail, are not incurred directly by an owner(s). LLC protects members from costly liability that might otherwise affect individual credit standing, or legal obligation to remedies in the circumstance of litigation.
Since Montana is a state with no sales tax, “pass-through” income is unmitigated by additional taxation. For sole proprietors, Montana law enables an owner to file individual tax reporting on business income without worrying about corporate capital gains or other business tax matters. LLC partnerships met with IRS Form 1065 filing reporting to the individual members of an entity, provide designated proportional income to the individual members, who in turn file personal tax reporting to meet the criteria for business income filing.
Do I Need An FEIN?
All LLC businesses require an IRS “Federal Employer Identification Number” FEIN in order to hire employees.
Why Do I Need An EIN?
The Employer Identification Number (EIN) is used to identify a business entity. A sole proprietorship does not require an EIN. An EIN is required of multi-member LLC when filing state and federal taxes. Banks usually require an EIN to open a business checking account. Application for an EIN can be done free of charge via the IRS.gov website.
How Do I Maintain A Montana LLC?
Maintaining LLC status in Montana State is a $15 a year reinstatement fee. The deadline for LLC filing of an annual report is April 15th.
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A limited liability company “LLC” taxation is not considered a separate tax entity by the Internal Revenue Service. Unlike a corporation; an LLC is a "pass-through entity" of the same category of tax classification as a partnership or sole proprietorship. Single member LLC and Multi-owner LLC status organizations provide an owner(s) with a channel for business expenditure tax deductions, and protection from legal liability associated with the debt obligations incurred by the business. While some states mandate income tax on LLCs, the federal government does not bind those entities to taxation.
For tax purposes, the single member LLCs is considered a sole proprietorship by the IRS. Sole proprietors are responsible for individual tax reporting of earnings from an LLC entity. Owners can submit an IRS Schedule C with a Form 1040 tax filing to report income derived from an LLC. A separate tax filing is not necessary.
Co-ownership of an LLC requires filing the same tax reporting as those businesses listed as “partnerships” with the IRS. Like single member LLCs, multi-owner LLCs are not responsible for paying taxes on business income. Income tax reporting is the obligation of the owners of the registered entity. Profit distribution from an LLC is reported by the partners of the business in an individual tax return with an IRS Form 1065. The LLC operating agreement documents each member’s distributive share. Proportional taxation is attributed to the percentage of earnings an owner derives from the multi-owner LLC business. Tax payment unless otherwise arranged with the IRS, is demanded of owners of a multi-owner LLC regardless if distribution of those earnings is made or not within the tax period. A Schedule K-1 listing proportional distribution of profit and losses for partners must be given to each member of the LLC. The record of profit and loss is also reported to the IRS by individual LLC members submitting Form 1040, with Schedule E.
Consider Electing Corporate Taxation
If an LLC regularly reports "retained earnings”, filing as a corporation with the IRS, may be recommended for tax purposes. Any LLC can choose to submit a Form 8832, Entity Classification Election when filing as a corporation. Corporate income tax rates are lower than the individual income tax rates under $74,000. Filing a corporate tax return also enables a LLC to provide its owners, partners, and employees with additional tax advantages, stock options, and stock ownership plan benefits.
Estimating and Paying Income Taxes
LLC members are not subject to tax withholding, and are not classified as “employees” of the corporation. The IRS guidelines to LLC related tax filings by individuals recommends estimated quarterly payments January, April, June, and September.
Owners of LLC corporations are responsible for "self-employment taxes" paid directly to the IRS. Those taxes are based on distributive right to earnings of the company, and are not calculated according to actual distribution during a given tax year. Reporting of the amount owed to the IRS on Schedule SE should be done in correspondence with annual tax filing. Social Security and Medicare are not paid by LLC owners of a corporation. The tax rate for “self-employed” business owners is 15.3 percent of net income up to an index ceiling amount, and 2.9 percent beyond the threshold. Reference the IRS website for current annual net income index limits.
Expenses and Deductions
Tax reporting owners of LLC businesses, can legitimately deduct business expenses from IRS reported income. Deductible expenses include start-up costs, equipment costs, marketing, and travel costs.
State Taxes and Fees
Most U.S. states tax LLC under the same rules as the federal government. Owners pay state income taxes as individual taxpayers. Additionally, some states levy taxes on the LLC itself. The LLC state tax rate is generally based on the reported earnings of the business. Franchise tax or minimum fee may be imposed by the Secretary of State, Department of Corporations, or Department of Revenue or Department of Taxation on all LLC businesses operating in those states.
Income Tax for LLC's Classified as Corporations or S Corporations
Election of corporation or S corporation status by a LLC is generally done for tax purposes. The tax rate determines the benefit of this decision. Submission of a Form 8832 - Entity Classification Election to the IRS enables the LLC to report income, and pay taxes, including state income tax, based on the alternate classification.
How LLC's Pay State Income Tax
Classification of the LLC for purposes of state income tax reporting is different state-by-state. Most states adhere to the federal IRS rules to LCC classification, yet modifications to the tax rate are common. Many states have opted to assign LLC businesses a flat tax rate.
Start Your LLC
Like a sole proprietorship or partnership, LLC filing with the IRS is based on individual tax return reporting. If a business has a LLC Operating Agreement, owners have additional control, but are potentially also liable for automatic LLC income tax reporting.
If I Do Nothing, How Will My LLC Be Taxed?
Depending on how many owners a LLC has, the IRS can assign LCC status to the entity without filing by one or more of the members. If the business is a single-member LLC, the IRS will tax it as a sole proprietorship. Multi-owner LLC are treated as a partnership by the IRS, with tax proportionality assigned according to percentage of ownership determined by proportional distribution of earnings. Where earnings are not reported by the members, but the LLC itself, partners are assigned equal proportional responsibility by the IRS by default.
What Forms Should I File?
New LLC must file an Operating Agreement with the state where the business will be located. An operating agreement is a contract between the members of the LLC, and outlines the structure of the entity. IRS filing of Form 1065 is required for LLC tax status. Partners of the LLC should be given a Schedule K-1 reporting of each member’s share of profits and losses. Members are owners of the LLC are must file individual taxes reflecting business income on IRS Form 1040 tax return and Schedule C.
How Can I Change My LLC Tax Identity?
Retained earnings are the primary reason a LLC will elect to transfer the status of the business to a S-Corp. S corporation status enables the business to grow through retention of profit. S-Corp status can be obtained by filing IRS Form 2553 “Election by a Small Business Corporation.” As a business grows larger, filing IRS Form 8832 “Entity Classification Election” to re-classify an entity as a corporation is recommended.
What Else Do I Need to Know?
Distributed earnings are taxable under federal IRS rules. Members of a LLC should make quarterly tax payments, or set aside the amount owed at the end of the tax year to cover any outstanding tax. Contact your state tax board to find out about franchise tax or other tax that may be attributed to income earned by way of LLC membership.
Advantages of self-employment
Despite tax reporting obligation to the IRS for business income generated by a LLC, owners are self-employed and can also reduce tax payments owed with deductible expenses; including costs associated with individual hotel and restaurant expenses. The advantage of the LLC is that it reduces personal liability for any legal problems or debts incurred from running the business. Less sophisticated in structure than the corporation, the LLC is a common solution to start-up business registration and tax responsibility.
Reasons for choosing an LLC
The limited liability company “LLC” structure has been part of federal rules to business formation for more than 30 years. As a member or owner of a LLC, partial responsibility for the business protects a partner from liability in case of a lawsuit. Losses are limited to proportional investment in a LLC as result of a lawsuit, or should the business default. More flexible than a corporate structure, the LLC is often used to launch speculative start-up ventures, and can be transferred to another form of company to meet tax obligations. Since LLCs are not stock issuing organizations, earnings are distributed solely to owners. In some U.S. states, banks, insurance companies, and other classes of business operations may not form LLC entities.
How to form an LLC
Defined by individual state rules to business operations, LLCs are governed by state law, and federal IRS tax rules. Articles of organization must meet state criteria, and must be filed with a filing fee with the designated Secretary of State or Department of Commerce in that jurisdiction. An annual registration fee generally follows. Most states provide a simple process for small business owners designed to expedite LLC formation. LLC entities with more than one owner, must draw up an operating agreement outlining proportional distribution of earnings per member, tax treatment, as well as procedural rules to managing operations and strategic decision making.
Tax treatment of an LLC
While LLC entities are responsible for state income tax in the jurisdiction of origin, and must adhere to IRS rules to federal income tax reporting.
A “limited liability company” (LLC) creates a “pass-through” for owner income. State income tax filing rules vary by state. Also treated as sole proprietorships or partnerships by LLC membership in the reporting of federal taxes, there are no set of tax rules that apply to LLCs, specifically. This can pose challenge for controller management of earnings distribution.
IRS default designations
Registration of a LLC with the IRS means that tax reporting will be treated as a sole proprietorship or partnership, depending on the number of owners. Since each designation is accorded separate tax filing rules, it is important to have knowledge of the rules to default designation status of a business at time of reporting. S-corporation or corporation status presents an alternative for LLC owners seeking to reduce personal obligation to tax reporting, and protection from debt obligations under law. It is important to note that electing corporate tax treatment requires filing IRS Form 8832. Form 8832 transfers the status of the LLC to corporation for five years. The designation is unchangeable until the five-year term has ended.
Partnership filing requirements
Multi-owner LLC are subject to IRS partnership tax rules. Though not responsible for the payment of taxes on business income, the LLC must prepare IRS Form 1065 and Schedule K-1 to report share of earnings for each of the entity’s members. Partners must file individual income tax reporting reflecting LLC filing of taxable earnings.
Corporate filing requirements
In cases where a LLC is reported to the IRS as a corporation, taxpayer obligation is that of the entity and not the individual owner(s) or member(s) of the company. LLC businesses that elect to be solely responsible for income tax reporting also benefit from deductible business expenses by filing IRS Form 1120. Corporate filing status establishes a five-year tax filing and payment obligation that must be met by the LLC, rather than the individual owners. Owners are also protected from liability where the LLC fails to file required tax reporting. Corporate treatment of business earnings can, however, can result in the enforcement of twice the tax amount on earnings. Tax is imposed on the LLC at time of filing, and again on the individual owner tax filings reporting dividends from those earnings.
Sole proprietor filing requirements
Single-member LLC are considered sole proprietorships by the IRS. Therefore, no separation between the LLC and the owner is recognized in tax reporting of earnings derived from the business. Owners must report all income from the LLC entity as individual income in annual or quarterly tax reporting. Personal obligation to meet tax payment demands can be a liability for an owner unable to cover tax obligations.
If you need help with LLC taxation, 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.