Whether you own a limited liability company yourself or you're simply curious, there are several important considerations about LLC tax to keep in mind. We're going to explore those in today's post to get you the answers you're looking for.
But first, let's start with a handy definition to ensure we're starting off from the same place.
Let's turn directly to the IRS to hear how they define an LLC:
"A Limited Liability Company (LLC) is a business structure allowed by state statute. Each state may use different regulations, you should check with your state if you are interested in starting a Limited Liability Company.
Owners of an LLC are called members. Most states do not restrict ownership, so members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit 'single-member' LLCs, those having only one owner.
A few types of businesses generally cannot be LLCs, such as banks and insurance companies. Check your state’s requirements and the federal tax regulations for further information. There are special rules for foreign LLCs."
As you can see, there are variations across different states. If you do own an LLC, this is one reason it's so important to have professional bookkeeping services on your side. That way, you can have the peace of mind you're following your state's requirements for LLC tax purposes.
Although the LLC tax requirements can vary, let's now discuss some general considerations that apply across the country.
First and foremost, it's important to cover how LLC taxation varies from corporation taxes.
As Investopedia explains:
"In the case of a corporation, profits are first taxed at the corporate level and then taxed a second time once those profits are distributed to the individual shareholders. This 'double taxation' is decried by many businesses and investors.
Limited liability companies, on the other hand, allow the profits to be passed directly to the investors so that they are taxed only once, as part of the investors’ personal income."
As such, it's appealing to many people to get an LLC designation rather than a corporation designation. Essentially, it can help business owners avoid double taxation which is an understandably big draw.
Another important consideration when it comes to LLC tax is how many members are in your LLC. This is important because that number determines whether the IRS will treat your LLC like a sole proprietorship or a partnership.
Speaking of the IRS, find out what kind of documentation they require for your small business in this post.
If your LLC has a sole owner, the IRS treats it as a sole proprietorship when it comes to taxes. In turn, this means "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. Even if you leave profits in the company's bank account at the end of the year -- for instance, to cover future expenses or expand the business -- you must pay income tax on that money."
On the other hand, if your LLC has co-owners, the IRS treats it as a partnership for tax purposes. This means: "Like one-member LLCs, co-owned LLCs do not pay taxes on business income; instead, the LLC owners each pay taxes on their share of the profits on their personal income tax returns (with Schedule E attached). Each LLC member's share of profits and losses called a distributive share should be set out in the LLC operating agreement."
(Does your business operate in more than one state? Then it's worth considering working with an EA for tax purposes, audits, and more. Find out if your business needs one here)
We understand you may have a number of other questions surrounding LLC tax, bookkeeping, payroll, or CFO advisory services. We're here to help however we can! Use this link to book a call with our team today.
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