Before opening the doors to a brand new Limited Liability Company (LLC), it’s important that you understand how your new entity will be taxed by the IRS – and what your LLC tax return should look like. The same applies to current LLC owners.
On the surface, an LLC is considered a pass-through business entity. This concept means that all business-related taxes, profits, losses, and deductions pass through to the personal tax returns of an LLC’s owners. However, LLC owners can choose to structure their businesses in a different way for tax purposes through the entity classification election. This decision, made using IRS Form 8832, is designed to allow business owners to take a corporate tax structure for their LLCs.
LLC Taxed as Sole Proprietorship
If you structure your LLC as a sole proprietorship, it will be taxed as such. This structure, also known as a single-member LLC taxed as a sole proprietorship, means any LLC taxes you incur will be directly passed on to your personal IRS tax requirements. Any taxes you owe for business-related activities would thus be due by the traditional April 15th tax deadline. However, you’d still be on the hook for estimated taxes that are incurred by all sole proprietors.
LLC Taxed as Partnership
If you have one or more members in the LLC, the taxes incurred by your LLC would also pass directly through to those partners in the business if you don’t elect a corporate tax structure. This means multimember LLCs that do not make the entity classification election would, by default, be taxed as a regular partnership. Just like with a sole proprietorship, all owners would handle their business-related taxes on their personal returns.
LLC Taxed as S Corp
Structuring an LLC to be taxed as an S Corporation is very similar to how an LLC taxed as a sole proprietorship is arranged. LLC taxation on S corps means that all taxes resulting from business activities are passed through
to the personal tax obligations of an LLC’s owners. This prevents double taxation. An S corp structure allows shareholders in a business to also classify themselves as employees, which can result in some nice tax savings.
LLC Taxed as C Corp
Choosing to structure your LLC as a C Corporation can have some nice advantages that are unavailable to other LLC tax structures. LLC taxation as a C corporation means that the LLC is taxed directly as a separate business entity, and business taxes are not passed through to the owner’s personal taxes. Taxing an LLC as a C Corp can offer more tax-saving opportunities through business deductions, allowing business owners to hold onto more of their hard-earned income. In addition, a corporate structure separates a business owner’s personal and business assets.
The Bottom Line on LLC Taxes
LLC owners should make the most appropriate decision for their specific situations when it comes to LLC taxes. It’s certainly worth considering a corporate tax structure for your LLC because of the tax benefits and savings you may be able to enjoy. Also, don’t forget to keep your operating agreement updated so that all members of your business are on the same page and understand their roles. With that said, all owners in a business should agree on how a company is taxed when your next LLC tax filing is due to Uncle Sam.
If you have questions about LLC taxes. LegalZoom can put you in touch with a tax professional who can answer your questions when you sign up for the business legal plan. For a low monthly fee, you will not only receive tax advice but you'll also receive unlimited phone consultations on new legal matters.
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