What Tax Return Does Your LLC File?


You’ve got an LLC, because you heard it was the best kind of business structure to have. Then, when it gets close to tax time, your CPA asks you, what kind of LLC you have. You draw a blank – what does he mean?

What he or she is asking for is whether or not you made a tax election for your LLC’s income. Unlike other types of companies, LLCs can choose, tax-wise, to be anything they want.

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 the owners. The income will be reported on the owner’s personal return, on either Schedule C or E, depending on business type. For flow-through partnership taxation, the LLC reports on a partnership return (IRS Form 1065) and flows profits through to the owners on Form K-1.

In either case the income is flowed through to the owners’ personal returns. Taxes are calculated based on each owner’s personal income tax rate. Depending on the type of business the LLC is doing, members may also be obliged to pay self-employment taxes on their portion of the income. If this is the case, a S or C Corporation election is preferable, to avoid this extra tax burden.

S Corporation Taxation:
With S Corporation taxation, the LLC is treated as if it was truly an S Corporation. 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. Members who receive a salary will pay income and payroll taxes on that money, but will just pay income taxes on the profit distribution portion. Members who are completely passive and do not participate in the running of the LLC may be able to have all income flowed through to them as passive profit distributions. In that case, those Members would pay income taxes on the money received.

C Corporation Taxation: With C Corporation taxation, the LLC is treated as though it had been incorporated as a C Corporation. 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. Members who are participating in the management of the LLC can take salaries. When the LLC-C does distribute profits out to the members it 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.

So which one is best? That’s a whole other story. The answer will depend on the business you’re doing. What you do with your LLC has a direct impact on how you make the tax election. If you aren’t sure which one is best, talk to one of our team members, or to your own business advisor. The answer may surprise you. Chances are, it will also save you some money when it comes time to pay your taxes, too!

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.

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