A limited liability company, or LLC, is a “hybrid” type of business organization that combines the limited liability benefits of a corporation with the pass-through taxation and relaxed reporting requirements of a partnership. The LLC is a creation of state legislatures, and the Internal Revenue Service does not explicitly recognize LLC’s for the purposes of federal taxation. Depending on the status of your company, the IRS classifies LLC’s as a sole proprietorship, partnership or corporation. Understanding how your LLC is classified for federal taxation purposes is important to knowing how to report your LLC’s income.
Fit your business needs with the right LLC package
Determine how the IRS classifies your LLC for tax purposes. The IRS classifies LLCs as either a sole proprietorship, partnership or corporation. If you are the only owner of your LLC, the default classification of your company is a sole proprietorship. If there is more than one owner of your LLC, the default classification of your company is a partnership. An LLC may file Form 8832 (see Resources) with the IRS and elect to be taxed as a corporation.
If classified as a sole proprietorship, file Form 1040. If your LLC is classified as a sole proprietorship, the profits and losses from the operation of your company must be reported on Form 1040, Schedule C (see Resources). Any income or losses realized from your company’s management of real estate must be reported on Form 1040, Schedule E (see Resources). If your company is engaged in farming, you must report income on Form 1040, Schedule F (see Resources). Additionally, you must file Form 1040, Schedule SE (see Resources) if you file Schedule C or Schedule E.
If classified as a partnership, file Form 1065 (see Resources). However, if you have personally received proceeds from the profits of a partnership, you must file Form 1040.
If classified as a corporation, file Form 1120 (see References). If your company has not previously reported income, you must also file Form 8832 to report that you want your company to be taxed as a corporation, not as a partnership or sole proprietorship.
Pay any applicable state taxes. In addition to federal income tax, the state where you have organized your LLC may require you pay state LLC taxes. Some states, such as California, assess a tax based on a percentage of income made by the LLC. Check with the state agency responsible for registering LLC’s to determine the tax and reporting requirements.
Tips & Warnings
- Consult with a tax professional before filing your taxes.
References & Resources
- Internal Revenue Service: Forms for Limited Liability Companies
- Internal Revenue Service: Limited Liability Company
- California Franchise Tax Board: General LLC Information
- Internal Revenue Service: Form 1120
- Internal Revenue Service: Form 8832
- Internal Revenue Service: Form 1040 Schedule C
- Internal Revenue Service: Form 1040 Schedule E
- Internal Revenue Service: Form 1040 Schedule F
- Internal Revenue Service: Form 1040 Schedule SE
- Internal Revenue Service: Form 1065
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