A Limited Liability Company (LLC) is not recognized by the IRS and is not a separate entity. The IRS calls it a “pass-through entity” because its profits and losses are passed through the business to the LLC members who will then report the required information on their own tax returns. It has the liability protection of a corporation but is a combination of a sole proprietorship or partnership operations. It is also an organization recognized in all states and since it doesn’t have any tax classification, IRS applies the existing tax classifications for this organization.
An LLC gives limited liability protection to its owners who are taxed under regular tax rates. To put it simply, the income of an LLC company will depend on the number of its members and whether it chooses to be treated as a different form of business which will then be taxed accordingly.
Taxation On Single-Owner LLCs
If you’re a sole owner of your LLC, you will be taxed as a single business owner or a sole proprietor. The IRS will treat one-member LLCs as sole proprietors and will file a tax return on Schedule C. The records of profits and losses of the LLC will be submitted together with your 1040 tax return. Along with the tax return submission, is the payment of self-employment tax base on the LLC’s income. Profits that are left on the company’s bank account every end of the year for business expansion will still be taxed by the IRS. However, the LLC itself doesn't need to pay taxes according to the tax law.
Taxation On Multiple-Owner LLCs
If an LLC has more than one owner will pay taxes as a partnership and still will not pay taxes based on business income. Filing partnership taxes involves filing an information return on Form 1065 transparent of the profit and losses of the partnership. Each partner will be given a tax form on Schedule K-1 that shows his or her own of the partnership’s profit or loss. This distributive share of the partners should have an LLC operating agreement and will be included in the owner’s personal tax filing.
Taxation On LLC’s as Corporations or S Corporations
An LLC can also pay income taxes as a:
S Corporation and LLC Differences
It’s important that you understand the tax differences between an S Corporation and an LLC before you change your LLC’s tax status. You will be required to meet the requirements by the IRS before you can change the status of your LLC such as the following:
If you’re planning to change your tax status, make sure you consult a tax professional for assistance. They will help you better understand the tax regulations of the IRS and help figure out whether your benefits outweigh the possible costs in any of the above-mentioned status.
State Income Taxation For LLCs
Since there are different means of LLC classification and each state for its state income tax, it is best to take a closer look at the taxation law of those states where your LLC is located. Usually, tax rates are modified or are charged a flat rate under federal (IRS) classification but this is not always the case for other states.