LLCs and Taxes

Many small business owners form LLCs to avoid the "double taxation" of a corporation. In a C Corporation, the IRS taxes profits at the corporate level and dividends at the shareholder level. In contrast, LLC owners can choose whether they would like the IRS to tax their business as a sole proprietorship, partnership, C Corporation, or S Corporation.

LLC Tax Benefits

• Owners/members can report their share of profits or losses on their individual tax returns.
• If the owners choose to treat the LLC as a sole proprietorship or partnership, they can utilize "pass-through taxation." Owners report their share of profits or losses in the company on their individual tax returns.
• Allocation of earnings among the members is flexible. Profits and losses do not have to be distributed in proportion to ownership.

LLC Tax Flexibility

Unless the owner of the company specifically elects to do otherwise for tax purposes, the IRS will automatically classify a single-owner LLC as a sole proprietor or a multiple-member LLC as a partnership without any special tax election. Owners report their profits or losses on Schedule C of their personal tax returns (usually Form 1040).

Though the LLC itself does not pay taxes to the IRS, an LLC taxed as a partnership does have additional requirements. LLCs taxed as partnerships file Form 1065 "U.S. Partnership Return of Income" with the IRS and issue each owner a Schedule K-1 to report their share of profit or loss.

 Owners may also elect to be taxed as a:

• C Corporation - An LLC may elect corporate tax treatment using IRS Form 8832 -  Entity Classification Election.
• S Corporation - An LLC may elect S Corp tax treatment by filing IRS Form 2553 - Election by a Small Business Corporation.

Learn more about how LLCs are taxed.  If you are unsure how you want the IRS to tax your LLC, you can still form your LLC now and choose its tax classification later once you've consulted with a tax advisor. 

Form your LLC today, or speak with an LLC.com Business Consultant at 1-866-963-7708 (toll-free) or 302-636-5457.