LLC Taxes

LLC 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 Taxes

Income 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.

LLC Taxes

LLC Advantages Disadvantages

LLC AdvantagesA limited liability company (LLC) has many advantages as a form of business entity:

Pass through taxation - under the default tax classification, profits taxed at the member level, not at the LLC level - no double taxation.

Limited liability - the members (owners) of the LLC, are protected from liability for acts and debts of the LLC.

An LLC can elect to be taxed as a sole proprietor, partnership, S-corp or corporation, providing the correct option for your business.

Can be set up with just one natural person involved or, in some states, one owner which may be an business itself.
No requirement of an annual general meeting for shareholders (in some states, such as Tennessee and Minnesota, this statement is not correct).

No loss of power to a board of directors (although an operating agreement may provide for centralization of management power in a board).

LLCs are enduring legal business entities, with lives that extend beyond the illness or even death of their owners, thus avoiding problematic business termination or sole proprietor death.

Much less administrative work and recordkeeping.

Membership interests of LLCs can be assigned, and the economic benefits of those interests can be separated and assigned, providing the assignee with the economic benefits of distributions of profits/losses (like a partnership), without transferring the title to the membership interest.

LLC Disadvantages

Earnings of most members of an LLC are generally subject to self-employment tax. By contrast, earnings of an S corporation, after paying a salary to the shareholders working in the LLC, can be passed through as distributions of profits and are not subject to self-employment taxes.

Since an LLC is considered a partnership for Federal income tax purposes, if 50% or more of the capital and profit interests are sold or exchanged within a 12-month period, the LLC will terminate for federal tax purposes.

If more than 35% of losses can be allocated to nonmanagers, the LLC may lose its ability to use the cash method of accounting.

An LLC which is treated as a partnership cannot take advantage of incentive stock options, engage in tax-free reorganizations, or issue Section 1244 stock.

There is a lack of uniformity among LLC statutes. Businesses that operate in more than one state may not receive consistent treatment.

In order to be treated as a partnership, an LLC must have at least two members. An S corp can have one shareholder. Although all states allow single member LLCs, the business is not permitted to elect partnership classification for federal tax purposes. The business files Schedule C as a sole proprietor unless it elects to file as a corporation.

Some states do not tax partnerships but do tax LLCs.

Minority discounts for estate planning purposes may be lower in a limited liability company than a corporation. Since LLCs are easier to dissolve, there is greater access to the business assets. Some experts believe that LLC discounts may only be 15% compared to 25% to 40% for a closely-held corporation.

Conversion of an existing business to LLC status could result in tax recognition on appreciated assets

LLC Taxes

LLC Individual Qwner

Individual 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 Taxes

LLC Multi Owner

Multi-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 - Choices

LLC 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

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