A limited liability company (LLC) is a business entity recognized in all 50 states that combines some of the features of partnerships and corporations. An LLC has specific filing requirements under U.S. tax law depending on how it is organized. If an LLC has multiple owners, called members, and is taxed as a partnership, it must file U.S. Return of Partnership Income (Form 1065) annually with the U.S. Internal Revenue Service (IRS).
How are LLCs taxed on their income?
Most LLCs pay income taxes the same way that a partnership does—as a pass-through entity. That is, they allocate all income and loss to the members who then report and pay tax on such income and loss through their individual tax returns. With partnership tax treatment, an LLC does not pay income tax separately as an entity.
An LLC does have the option of electing a different tax treatment by filing an Entity Classification Election (Form 8832) with the IRS. With Form 8832, an LLC can choose to be taxed as either a C corporation or S corporation instead of a partnership.
What federal tax forms are LLCs required to file?
The number of members and whether it has filed a tax election form with the IRS determine which tax forms an LLC must file.
LLC with One Member
An LLC with one owner, or a single-member LLC, that has not filed an election to be taxed as a corporation is a "disregarded entity" for federal tax purposes and is taxed like a sole proprietorship, including for self-employment income.
Single-member LLCs report business income, loss, and expenses on the member's U.S. Individual Income Tax Return (Form 1040) using these schedules:
- Profit or Loss From Business (Sole Proprietorship) (Form 1040, Schedule C)
- Net Profit From Business (Sole Proprietorship) (Form 1040, Schedule C-EZ)
- Supplemental Income and Loss (From rental real estate, royalties, partnerships, S corporations, estates, trusts, REMICs, etc.) (Form 1040, Schedule E)
- Profit or Loss From Farming (Form 1040, Schedule F)
The owner is not considered an employee of the sole proprietorship, so the annual Form 1040 must include the Self-Employment Tax (Form 1040, Schedule SE) to report self-employment income.
LLC with Two or More Members
An LLC with two or more members that has not filed an election to be taxed as a corporation files Form 1065 and reports income or loss to the members using Partner's Share of Income, Deductions, Credits, etc. (Form 1065, Schedule K-1). Each member then uses the Schedule K-1 to include the income or loss in their individual annual tax return.
LLC Electing S Corporation Tax Treatment
An LLC electing to be taxed as an S corporation files an annual U.S. Income Tax Return for an S Corporation (Form 1120S). Because S corporations pass their income through to the owners like a partnership, LLCs making this election also report income or loss to the members using Schedule K-1. The members then use the Schedule K-1 to include the income or loss in their individual annual tax returns.
LLC Electing C Corporation Tax Treatment
An LLC taxed as a C corporation files an annual U.S. Corporation Income Tax Return (Form 1120), does not pass its income or loss through to the members, and is a direct taxpayer on its income. An LLC with a C corporation election is likely to employ its members as salaried employees.
An online legal services provider can help you form an LLC, but your company's accountant is a valuable resource to help you decide what tax treatment to elect for your LLC and to keep you compliant with all required filings.
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