An Overview on LLC Taxation
Calculating and paying for taxes is never easy. It’s especially tricky if you are a member of a limited liability company, since this business structure allows for a wide range of tax treatment options. Lucky for you, there’s this guide to help you navigate the murky waters of LLC taxation.
How your LLC will be taxed depends on whether the IRS views your company as a sole proprietorship, a partnership, an S corporation, or a C corporation. The IRS may tax the individual members, the LLC as a whole, or both. Remember that the LLC is legally considered a different business entity from the members comprising it. Understanding this distinction will make the concept of LLC taxation less confusing.
LLC taxation for one-member companies is straightforward: the lone owner pays the LLC’s taxes based on the company’s net income. There is no need to file separate returns for the owner and the company.You can choose to have your company treated as a corporation-provided that you also allow it to be taxed as such.
Multi-owner LLCs file two separate tax returns: the 1065 partnership tax return for its business income, and the Schedule SE tax form for the self-employment taxes of each member. Self-employment taxes depend on the agreed profit-loss sharing between the members.
LLC taxation rules for this business structure work like that of a standard corporation. Essentially, the aggregate profits of the C corporation are taxed according to the prevailing corporate tax rate, and any profits distributed as dividends among members are taxed according to the dividend rate. Though the members don’t need to file individual returns, they still need to pay payroll taxes in behalf of their employees.
The LLC taxation system for S corps is unusual. A return is filed in behalf of the LLC (i.e. Form 1120S), but the company’s profits aren’t taxed as a whole. Instead, tax money comes straight out of the individual members’ pockets, again according to their operating agreement. The members declare these taxes via individual returns.
The LLC taxation system is only one of several considerations you have to bear in mind when choosing an LLC structure. All of these have their pros and cons, and it’s important that you do your research on which structure is in the best interest of your company. Always take time to consult the experts, like your lawyer, accountant, or even registered agent.