A limited liability company, or LLC, can be taxed in a variety of ways. Under IRS default rules, for tax purposes, an LLC is either disregarded or treated as a partnership, depending on how many members it has. An LLC can elect to be taxed as a corporation under either Subchapter C or Subchapter S of the Internal Revenue Code. State taxation of LLCs varies from state to state.
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If you own a single-member LLC, the IRS will treat you as if your are a sole proprietor. It will treat all of the LLC's income as your personal income and tax you at individual income tax rates. You must report all LLC income on your Form 1040 tax return, and on schedule C,E,F or J, depending on the type of income.
LLCs With Two or More Members
If an LLC has at least two members, the IRS will treat it as a partnership. Although the LLC itself will not be taxed, all of the LLC's income will be allocated among the members and taxed as individual income. Even if the LLC makes no distributions to its members, its income is still allocated to each member according to that member's right to receive profits from the LLC -- usually in direct proportion to the members' ownership interest. An LLC may elect to distribute profits in a proportion that is different from the members' ownership interest -- for example, a member may own 40 percent of the LLC but be entitled to 50 percent of its profits. In this case, the IRS will attribute 50 percent of the LLC's income to that member. The LLC must file Form 1065 and Schedule K-1, while the members must file Form 1040.
LLCs Taxed as C Corporations
An LLC may elect to be treated as a C corporation by filing Form 8832 with the IRS. The IRS will then tax the LLC at corporate tax rates, and will tax members only on distributions that they receive from the LLC. Despite this double taxation of LLC distributions, if the LLC does not distribute most of its income to its members, C corporation tax treatment might result in a lower overall tax burden. The LLC must file Form 1120, and the members must file Form 1040.
LLCs Taxed as S Corporations
Many small businesses qualify as S corporations under the Internal Revenue Code. A qualifying LLC can elect S corporation tax treatment by filing Form 2553 with the IRS. The IRS will not tax the LLC, but will tax members on all LLC income. Self-employment tax, however, will be levied only on income that is actually distributed to members. LLCs taxed as S corporations file Form 1120S, and members file Form 1040.
Every state applies its own taxation scheme to LLC organized in that state, and to LLCs from other states that are licensed to do business in that state. A state may impose a flat annual fee on LLCs, or tax LLCs' incomes. Some states, such as California, only tax LLC income that exceeds a certain threshold amount. The state tax burden on LLC income is typically lower than the federal tax burden.
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