Though a business may select to be an LLC under state law, the federal government does not allow a business to file federal income taxes as an LLC. A business may choose to file federal income taxes as either a partnership or as a corporation. When a business files taxes as a partnership, it must send Form 1065, called Return of U.S. Partnership Income, to the IRS to report its earnings.
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The partnership structure for an LLC is the default filing status under federal law. According to the IRS, if a partnership does not specifically file Form 8832, Entity Classification Election, the IRS will tax it as a partnership if it has two or more owners. Some states allow a single person to own an LLC, making it legally a sole proprietorship. An LLC must file Form 8832 to pay income taxes as a corporation.
Partnership vs. Corporation
A partnership is usually a better option than a corporation for income tax purposes. Corporations must pay federal taxes on the income that they earn, and then the shareholders pay taxes again when they receive dividends from the corporation. One major benefit of the LLC structure is the opportunity for an owner to have a corporate shareholder's limited liability under state law, while retaining the option to file an income tax return as a partner.
An LLC has the option to file Form 1065 online, and must file it online if it has more than 100 members, according to the IRS. The partnership can request a hardship waiver from the IRS if filing Form 1065 online would be a burden on the firm.
A state that allows a company to form an LLC may also require the company to file a state Form 1065 to report its income. The state versions of Form 1065 are similar to the federal version, and states usually require LLCs to submit portions of the federal Form 1065 along with the state forms.
When an LLC files Form 1065, it must also prepare Schedule K and K-1. Schedule K lists the partnership income available to all partners; Schedule K-1 shows an individual partner's share of partnership income. According to the IRS, an LLC must attach a copy of Schedule K-1 to Form 1065 on separate pieces of paper for each individual partner. Each partner also gets a copy of his K-1 from the LLC, and uses this form to calculate income tax liability.
References & Resources
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