If you have elected to set up your business as an LLC (Limited Liability Company), the next question you may have is, How to File Your LLC Tax Return. When an LLC is formed, you can choose the way you are taxed. This flexibility is also what makes the LLC structure desirable to small business owners.
If you are interested in learning about the Real Life Benefits of Forming an LLC (Limited Liability Company), see the following link.
How to File LLC Taxes
LLC’s are required to file annual tax returns, but there is no such thing as an LLC tax return. The IRS allows an LLC to use partnership, corporation or sole proprietor tax rules. If the LLC has only one member then they would be taxed as a sole proprietor. If the LLC has multiple members, they would be taxed as a partnership or a corporation.
The Single Member LLC Tax Return
A single member LLC is considered a “disregarded entity” by the Internal Revenue Service. This means the LLC is disregarded for tax purposes, but still has the limited liability protection on the company level. The income or loss from the LLC flows through to the member’s personal income tax return. The single member is a sole proprietor for tax purposes and files Schedule C to report their income and expenses of the LLC. The net amount is reported and attached to Form 1040, U.S. Individual Income Tax Return.
Multiple Member LLC Taxed Like a Partnership
If your LLC has more than one member, by default it is taxed as a partnership and would be required to file Form 1065 (Partnership Income Tax Return). The income or loss will flow through to the members and will be reported on their personal income tax returns. Members have to pay taxes on the entire share of the profit, even if it was not distributed to them.
Multiple Member LLC Taxed Like a Corporation
A multiple member LLC can elect to be taxed as a corporation by filing Form 8832 (Entity Classification Election). The LLC would then be required to file Form 1120 (Corporate Income Tax Return), reporting the income and expenses of the company every year. There are several reasons an LLC may want to be taxed as a corporation, the main one being if you wanted to leave money in the business to fund future growth. Corporate tax returns can be complex and naturally are faced with the issue of double taxation.
LLC Taxed Like an S Corporation
The possibility exists to have your LLC taxed as an S corporation. A special election with the IRS needs to be filed with Form 2553. If approved, an LLC taxed as an S corporation files a Form 1120S (S Corporation Income Tax Return). Like a partnership, members receive a Schedule K-1 and report their share of the income or loss on their individual income tax return. Advantages of this structure include avoiding corporate double taxation and avoiding self-employment taxes (currently 15.3%) on the LLC income at the member’s personal level. Setting up an LLC taxed as an S corporation gives you simplified administration of the LLC and the tax advantages of an S corporation.
Conclusion: How to File Your LLC Tax Return
Each organizational form has its pros and cons, so be sure to consider how the various aspects will affect your unique business operation. The information presented in the above article is general in nature, and not warranted or guaranteed. Laws change and each situation is different, so be sure to speak with a Certified Public Accountant or a trusted tax advisor on how to file your LLC tax return since it can affect your business for many years to come.
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To your success!
Noel B. Lorenzana
Disclaimer: Any accounting, business or tax advice contained in this article, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, I would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.