LLC TaxesLLC Taxes
- An LLC
is not a separate tax entity like a corporation; it is what the IRS calls a pass through entity, like a partnership or sole proprietorship. All of the profits and losses of the LLC pass through the business to the LLC owners , who report this information on their personal tax returns. The LLC itself does not pay federal income taxes, but some states do charge the LLC itself a tax. Use the links on this page and take advantage of the LLCs that will be most beneficial to your business.
LLC TaxesIncome Taxes:
The IRS treats your LLC like a sole proprietorship or a partnership, depending on the number of members in your LLC.
If you've already done business as a sole proprietorship or partnership, you are aware, because you know many of the basic rules.
LLC Taxes - Structure
The LLC is a relatively new type of hybrid business structure that is now permissible in most states. It is designed to provide the limited liability features of a corporation and the
tax efficiencies and operational flexibility of a partnership. Formation is more complex and formal than that of a general partnership.
The owners are members, and the duration of the LLC is usually determined when the organization papers are filed. The time limit can be continued if desired by a vote of the members at the time of expiration. LLC's must not have more than two of the four characteristics that define corporations: Limited liability to the extent of assets; continuity of life; centralization of management; and free transferability of ownership interests. Advantages
- Owners have limited personal liability for business debts even if they participate in management
- Profit and loss can be allocated differently than ownership interests
- IRS rules now allow Limited Liability Corporation LLC to choose between being taxed as partnership or corporation
- More expensive to create than partnership or sole proprietorship
- State laws for creating Limited Liability Corporation (LLC) may not reflect latest federal tax changes
LLC Individual QwnerIndividual Owner LLC:
The IRS treats one member LLCs as Sole Proprietorship for tax purposes. This means that the LLC itself does not pay taxes and does not have to file a return with the IRS.
As the sole owner of your LLC, you must report all profits or losses of the LLC on Schedule C, and submit it with your 1040 tax return. If you leave money in the company's bank account at the end of the year, to cover future expenses or expand the business you must pay taxes on that money.
LLC Multi OwnerMulti-Owner LLC
The IRS treats co owned LLCs as Partnerships for tax purposes. Co owned LLCs themselves do not pay taxes on business income; instead, the LLC owners each pay taxes on their lawful share of the profits on their personal income tax returns, with Schedule E. Each LLC member's share of profits and losses, which is called a distributive share, is set out in the companies' operating agreement.
Most operating agreements provide that a member's distributive share is in proportion to his percentage interest in the business. For example, if Donna owns 60% of the LLC, and Tony owns the remaining 40%, Donna will be entitled to 60% of the LLC's profits and losses, and Tony will be entitled to 40%. If you'd like to split up profits and losses in a way that is not proportionate to the members' percentage interests in the business, this is called a "Special-Allocation
," and you must follow IRS rules.
However the distributive shares are divided up, the IRS treats each LLC member as though she receives her entire distributive share each year. This means that each LLC member must pay taxes on their distributive share whether or not the LLC actually distributes the money to her. The practical significance of this IRS rule is that even if LLC members need to leave profits in the LLC -- for example, to buy products or expand the business each LLC member is liable for income tax on their share of that money.
Even though a co-owned LLC itself does not pay income taxes, it must file Form 1065 with the IRS. This form, the same one that a partnership files, is an informational return that the IRS reviews to make sure the LLC members are reporting their income correctly. The LLC must also provide each LLC member with a "Schedule K-1," which breaks down each member's share of the LLC's profits and losses. In turn, each LLC member reports this profit and loss information on his individual Form 1040, with Schedule E.
LLC Taxes - ChoicesLLC can decide on Corporate Taxation Methods
If your LLC will regularly need to retain a amount of profits in the company, you can save money by electing to have your LLC taxed as a Corporation.
Paying Income Taxes Because LLC members are not considered employees of the LLC, but rather Self Employment business owners, they are not subject to withholding taxes. Instead, each LLC member is responsible for setting aside enough money to pay taxes on his share of the profits. You must estimate the amount of tax you will owe for the year and make payments to the IRS each quarter -- in April, June, September and January. Limited Liability Structures
Professional Limited Liability CompanyAdvantages
- Same advantages as a regular limited liability company
- Gives state-licensed professionals a way to enjoy those advantages
- Same as for a regular limited liability company
- Members must all belong to the same profession
Limited Liability PartnershipAdvantages
- Mostly of interest to partners in old-line professions such as law, medicine, and accounting
- Owners (partners) aren't personally liable for the malpractice of other partners
- Owners report their share of profit or loss on their personal tax returns
- Unlike a limited liability company or a professional limited liability company, owners (partners) remain personally liable for many types of obligations owed to business creditors, lenders, and landlords
- Not available in all states
- Often limited to a short list of professions.
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