How an LLC Claims Profit and Losses

By Terry Masters

A limited liability company, or LLC, is a business entity type that has a history in the United States that spans decades rather than centuries. The relative newness of the format means that the Internal Revenue Service has yet to recognize the LLC as a specific tax entity type. Instead, the IRS classifies an LLC as one of the existing entity types that are defined in the tax code, based on the number of owners, known as members, and the tax elections those owners make. Single-member LLCs can elect to be taxed as a sole proprietorship or a corporation. Multiple-member LLCs can elect to be taxed as a partnership or a corporation. The way a LLC claims profits and losses depends on this tax election.

LLCs Taxed as Sole Proprietorships

Step 1

Create a year-end report of business revenue and expenses. Since a sole proprietor's operating period is a calendar year, this report should be prepared in the weeks immediately following December 31.

Step 2

Record revenue and expenses on IRS Form 1040, Schedule C, Profit or Loss from Business, on the LLC member's individual federal income tax return. Some types of revenue and expenses should be recorded on Schedule E for supplemental profits or losses or Schedule F for farming profits or losses.

Ready to start your LLC? Start an LLC Online Now

Step 3

Claim Schedules C, E or F profits and losses under the rules for individual tax obligations. Any resulting business profit that is indicated on Schedules C, E or F is taxed at the member's individual tax rate. Any resulting business loss is deducted from the member's income from other sources, resulting in a lower tax assessment on that income.

LLCs Taxed as Partnerships

Step 1

Create a year-end report of business revenue and expenses. Also, tally the capital accounts for all members, including loans, equity contributions and capital distributions. LLCs with multiple members must have an accurate year-end record of each member's ownership interest percentage as of December 31, so each member can be allocated his share of profits and losses.

Step 2

Prepare IRS Form 1065, U.S. Return of Partnership Income, for the LLC. This is an information return for the business, not a regular tax return. An LLC that is taxed as a partnership passes its profits and losses through to its members. This return simply notifies the IRS of the amounts that will be passed through to members to ensure that taxes are paid. Part of Form 1065 is Schedule K-1, which is a record of how profits and losses should be allocated to each member.

Step 3

Send each member a copy of Schedule K-1. The member will use Schedule K-1 to transfer his portion of business profits and losses to his personal income tax return; the amounts will be taxed at the individual rate.

LLCs Taxed as Corporations

Step 1

Generate the LLC's fiscal year-end financial reports. An LLC that is taxed as a corporation can select a fiscal year that ends in any month; it must file its return by the 15th day of the 3rd month after the end of its tax year.

Step 2

Prepare IRS Form 1120, U.S. Corporation Income Tax Return. An LLC that elects to be taxed as a corporation is taxed as a C corporation and pays taxes in it's own name unless it elects to be taxed as an S corporation. Profits and losses for a C corp are recorded on Form 1120; the business pays taxes at the corporate income tax rate.

Step 3

Prepare IRS Form 1120-S, U.S. Income Tax Return for an S Corporation if the LLCs that has elected to be taxed as an S corporation. S corporations are disregarded entities like partnerships. This form functions just like a partnership return, informing the IRS of profits and losses, but generating a Schedule K-1 so the amounts can be claimed on the members' individual tax returns.

Ready to start your LLC? Start an LLC Online Now
How to Report Income as an LLC Member



Related articles

Advantages & Disadvantages of a Limited Liability Company

A limited liability company, or LLC, is an entity that offers both advantages and disadvantages to a business owner. The advantages can range from liability protection to tax benefits, while drawbacks may include lack of uniformity and consistency among the state statutes governing LLCs. A savvy business owner should consider all these advantages and disadvantages before deciding whether a limited liability company is the preferred structure for her enterprise.

How to Document Members in a Limited Liability Company

The owners of a limited liability company, or LLC, are known as members. Unlike a corporation, where ownership is represented by holding shares of stock, an LLC maintains a record of ownership through internal record keeping. Each member is allocated a capital account on the company's books that is the original amount of money, property and services a member contributed to capitalize his ownership interest, plus or minus any additions or withdrawals made to the account over time. An LLC has a legal duty to maintain an accurate accounting of members and each member's capital account for tax purposes.

What Forms Do I Need to File for an S Corp?

An incorporated business is automatically designated by the Internal Revenue Service as a C corporation for income tax purposes. However, certain smaller corporations can elect to be taxed as S corporations without forfeiting the liability protections that the corporate structure affords to shareholders. Making the initial election requires filing an IRS form. Once S corporation status is granted, the tax forms the corporation must file annually will change.

LLCs, Corporations, Patents, Attorney Help LLCs

Related articles

Federal Requirements for a Nonprofit LLC

An LLC, or limited liability company, is a form of legal entity that has more flexibility in its operations than a ...

Can an LLC Be a Joint Venture?

Jurisdictions within the United States allow for the creation of a limited liability company structure to run the ...

What Tax Forms Are Needed for an LLC?

Federal tax law does not provide specific rules that govern every limited liability company. Instead, the Internal ...

S-Corporation Tax Write Offs for Losses

An S corporation is a small corporation that meets certain criteria and has made an election with the IRS to be treated ...

Browse by category
Ready to Begin? GET STARTED