Top Things to Know About Taxation of LLCs

A limited liability company (LLC) gives owners — known as members — a lot of leeway in how the business is structured and managed, as well as some flexibility in how business earnings are taxed. Check out the below infographic for an overview of our top taxation tips for your LLC:

 

 

Inforgraphic Transcript: 

  • 2,515,073 LLCs reported income and expenses to the IRS for 2015 [1]
    • LLCs are one of the most popular business structures in the U.S.
  • Most states do not restrict ownership of an LLC
    • LLCs are governed by state statute. Members may include individuals, corporations, other LLCs and foreign entities.
  • The number of members is unlimited
    • An LLC may be have just one member, or it can be a multi-member LLC with two or more owners.
  • LLCs are not taxed as a separate business entity
    • Unlike for corporations, all profits and losses “pass through" to the members of the LLC, who report those profits and losses on their personal federal income tax returns.
  • Single-member LLCs are treated as a sole proprietorship
    • If you're the only member, don't file a separate tax return. Instead, you report all profits and losses of the business on Schedule C and attach it to your personal income tax return (Form 1040).
  • Multi-member LLCs report profits and losses on Form 1065
    • In addition, give each member a Schedule K-1, showing their share of partnership income, deductions and credits. How a multi-member LLC shares profits and losses is defined in the LLC operating agreement.
  • No need to worry about tax withholding
    • Each member is considered to be self-employed and must make their own quarterly estimated tax payments.
  • 20% income tax deduction if eligible
    • Starting with tax year 2018, LLC members may be able to deduct up to 20% of their pass-through income from an LLC (Form 1040, Line 9). The deduction is limited for "specified service trades or businesses" with taxable income over $157,500 for single filers and $315,000 on joint returns. The pass-through deduction is complex, so talk to your tax advisor to take full advantage of this new deduction.
  • You choose how you get taxed
    • An LLC can opt to be taxed as a corporation by completing Form 8832. At tax time, file Form 1120 so that taxes will be paid by the business.
  • 21% or 37%?
    • Starting with tax year 2018, corporations are taxed at a flat 21% rate on all of their profits. That's much lower than the top individual income tax rate of 37% — so LLC members may save money on their taxes by choosing to be taxed as a corporation. But corporate taxes can be complex and costly, so this is usually only a smart move if you plan on raising venture capital. Talk to a tax advisor to weigh the costs vs. benefits.

 

 

[1] Internal Revenue Service, “SOI Tax Stats – Partnership Statistics by Entity Type," https://www.irs.gov/statistics/soi-tax-stats-partnership-statistics-by-e..., Accessed February 13, 2019.

 

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Posted on Date:
Thursday, March 28, 2019