A limited liability company, or LLC, has a unique status with the IRS, and is the only business entity type where the owners get to choose how the IRS treats the business for federal tax purposes. The IRS tax classification options require bookkeeping under different tax rules and the preparation of completely different tax returns, depending on the choice made. Despite this flexibility, however, the basic preparation for filing an LLC tax return is substantially the same across classifications.
Fit your business needs with the right LLC package
Look up your LLC's IRS tax election. Every LLC must elect how it will be treated for federal tax purposes. A single-member LLC can choose to be taxed as a sole proprietor or a corporation. A multi-member LLC can choose to be taxed as a partnership or a corporation. An LLC that is taxed as a sole proprietorship doesn't fill out any tax return at all; instead, a member records all income and expenses on Schedule C of his individual tax return, or 1040. An LLC that is taxed as a partnership files Form 1065, and an LLC that is taxed as a corporation files Form 1120. Your LLC should have a confirmation letter from the IRS that reflects the choice made for tax classification as part of the company records.
Retrieve last year's tax returns, if the LLC file taxes last year. Unless this is the first year the LLC will be filing taxes, you will always need the tax return from the prior year to complete the current year's return. Last year's return will contain carryover amounts and depreciation schedules, as well as the profit and loss attribution to members, among other things.
Prepare the company's books. The company should have some procedure for recording and classifying income and expenses, either through the use of a bookkeeper or an accounting program. Get a printout of the balance in the company's income and expense accounts.
Update the record of the capital accounts of each member. Ownership of an LLC is reflected through a member's capital account. The capital account is the amount of money, property and services the member has contributed to the company, less any withdrawals. Typically, the capital account also reflects the member's entitlement to an allocation of the company's profits and losses, which can be in proportion to a member's ownership interest.
Check for changes in the share of profits and losses due each member. An operating agreement can change the way profits and losses are allocated to members. Instead of allocating these amounts in direct proportion to a member's ownership interest as reflected by his capital account, the members can agree to a greater or lesser apportionment.
Retain an accountant or a do-it-yourself tax program. After collecting the basic information -- tax classification, categorized income and expenses, changes to capital accounts, and profit and loss allocations -- decide whether you will need an accountant to prepare your tax return or whether you are comfortable using a tax program. Typically, if the LLC is being taxed as a sole proprietorship and the member is accustomed to preparing his own taxes, he would likely continue to do so. Comparatively, an LLC that is classified as a corporation must conform to more advanced tax rules, and an accountant might be needed.
References & Resources
- Business.gov: Limited Liability Company
- FindLaw: How LLCs Are Taxed
- IRS.gov: Limited Liability Company (LLC)
- Essential LLC Accounting Concepts
- Citizen Media Law Project: LLC Records
- IRS.gov: LLC Filing as a Corporation or Partnership
- IRS.gov: Forms for Limited Liability Companies (LLC)
- U.S. Small Business Administration: Small Business Planner
- ABA Family Legal Guide: Forming and Operating a Small Business
- SCORE: Business Tools
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