LLCs and Taxes

How the LLC is treated for taxes depends on the election you make. There are three basic types of taxation: flow-through single-member or partnership, S Corporation and C Corporation.

Flow-Through Taxation: With flow-through single-member taxation, the LLC records income, deducts all expenses, and then flows the net income before taxes (or loss) through to you, as the owner. The income will be reported on your personal return, on a Schedule C.

If your LLC has more than one owner, in this instance it will be considered a partnership for taxes. That means it will first report income and expenses on a Partnership Return (IRS Form 1065) and then show your share of that income or loss on a Schedule K-1, which you then report on your personal return.

In either case the income is flowed through to your personal return, and taxes are calculated on your personal rate. If you’re operating an active income business through this passive tax model though, you’ll also have to add in self-employment tax which is just over 15%. That’s why we suggest that active business owners go with the S Corporation or C Corporation tax model instead.

S Corporation Taxation: With S Corporation taxation, your LLC is treated as if it was truly an S Corporation. We call this type of LLC an LLC-S. It will file an S Corporation tax return and follow all S Corporation tax rules. That means it can split the income into both a salary stream and a profit distribution stream. Your salary portion will have income and payroll taxes deducted from it, but your profit distributions will just be subject to income tax. If you have silent partners in the business to, i.e., Members who are completely passive and do not participate in the running of the LLC, they may be able to have their profits flow through as distributions, without any deduction for payroll taxes.

C Corporation Taxation: With C Corporation taxation, your LLC is treated as though it had been incorporated as a C Corporation. We call this type of LLC an LLC-C. It will file a C Corporation tax return, pay tax and estimated tax payments at the corporate rate, and may or may not elect to distribute profits. If you’re participating in the management of the LLC, you can take a salary. When the LLC-C does distribute profits out to the members they will come will be in the form of a dividend, just like it would if you had a corporation. That means members will have to declare and pay taxes on those dividends personally.

There are many variables when you’re structuring a business. That’s why it’s hard to go through a quick-service website. Unless you talk to someone who’s got some knowledge and experience on both the tax and the legal side, it’s hard to know what you don’t know. And that can leave you vulnerable.

Got questions? Contact us! We’re here for you.

Related posts:

Leave a Reply