Top Things to Know About Taxation of LLCs

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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. 

 

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