You’ve decided to structure your business as a limited liability company (“LLC”) and tax time is approaching. Whether you are new to filing LLC taxes or a seasoned veteran, we’ll guide you on how to file LLC taxes. Let’s first kick it off by going over the background of an LLC and then we will touch on how to file.
Key Things to Keep In Mind With Limited Liability Companies
As we lay the framework for limited liability company taxes, there are a few main points to keep in mind.
- Limited liability companies are established at the state level.
- LLCs offer pass-through taxation and limited liability protection
- They offer flexible ownership
Limited Liability Company Taxes: Understanding the Tax Status
Whenever someone talks about limited liability company taxes, it is important to understand the difference between single-member LLCs and multi-member LLCs. LLCs can grow from a single member to a multi-member LLC and retain a similar tax status. This tax status is pass through taxation.
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Single Member LLCs: How They Are Taxed
A single-member LLC is exactly as it sounds, there is one owner/ member of the LLC. Most people will then ask, why would anyone have an LLC and not a sole proprietorship? The answer is twofold. A single-member LLC files taxes like a sole proprietorship but it has added benefits of liability protection and being able to expand as needed.
Think of a single-member LLC as a sole proprietorship for tax purposes. This is how the IRS sees them. They completely disregard the LLC. In fact, a single-member LLC uses a Schedule C (Form 1040) to report their income and expenses from their business, just like a sole proprietorship.
You are going to need to file your tax return by April 15th, similar to a sole proprietor or individual return so no changes to worry about on that front. Now let’s dive into a multi-member LLC.
Multi-Member LLCs: Taxation Explained
Multi-member LLCs are fantastic company structures but their taxes follow partnership taxation. If you aren’t familiar with partnership taxation then the easiest way to think of it is that the income passes through the business and gets taxed at the partner level, proportional to their share of the business.
It doesn’t matter if you have two members or 37 members, the LLC follows the same process for its taxes. First, the multi-member LLC needs to fill out IRS Form 1065 ( U.S. Return of Partnership Income). This will report all the income and expenses of the multi-member LLC. You or your accountant will also need to fill out Schedule K-1 which is a schedule of IRS Form 1065
Schedule K-1s show each member’s share in the profits. K-1s and Form 1065 need to be filed by the 15th of the 3rd month. Typically this is March 15th.
An alternative option is to elect for the LLC to file under the tax rules of a corporation. If you decide to make his election on IRS Form 8832 then the IRS looks for you to stick with this election for five years.
Treating an LLC as a Corporation for Taxes: What to Know
When an LLC elects to be taxed as a corporation, it has two choices – a S Corp or a C Corp. Most LLCs stick with an S Corp so they are not taxed twice. Not to dive too far into S Corp accounting but the income, losses, deductions, and credits pass through to the shareholders.
Conversely, the IRS recognizes a C Corp as a separate legal tax-paying entity. This means it is taxed at the corporation level and the owners are also taxed again on the distribution of profits from the C Corp. Commonly this is what is referred to as double taxation.
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What You Need to File Limited Liability Company Taxes
Keeping support for a LLC is much like a sole proprietorship or any other business for that matter. You’ll need accurate books, records and receipts. Having a good set of books only makes the tax season easier for whoever has to prepare the tax return. Two areas to focus on when keeping your books for your LLC include:
Income support: This includes all the money you earned from your business, such as invoices, receipts, business investment account and bank statements.
Expense receipts: This includes all the money you spent on your LLC, such as office supplies, rent, and utilities.
The easiest way to track all of these items year over year is to use a bookkeeper if you don’t keep the books yourself. For most LLCs, Freshbooks and Quickbooks can get the job done. When tax season comes around, you’ll just need to export and hand off the files to a CPA or prepare
What Forms Do You Need to File as a Limited Liability Company?
As a limited liability company, we’ve talked about the couple ways you can file your taxes but let’s clarify the forms. Here are the major forms you’d need to file LLC taxes.
| Single member LLC | Form 1040 (Schedule C) |
| Multi-member LLC | Form 1065 |
| To elect to file as a corporation | IRS Form 8832 |
| File as an S Corp | Form 1120-S |
| File as a C Corp | Form 1120 |
Filling Out Your LLC Tax Return
If you need help filling out a Schedule C for a single member LLC then head over to where we explained filling out a Schedule C. When you start to need a partnership or corporation return filed then it is best to employ a qualified tax preparer like a CPA.
How Much Do LLC Tax Returns Cost?
While the cost varies from preparer to preparer, especially in terms of complexity, LLC tax returns often start around $1,000 a return and can increase from there to go much higher.
How to File LLC Taxes: Final Thoughts
Limited liability company taxes really put the choice in your hands. Do you plan to be a single-member LLC, have many members or even want to be treated as a corporation for tax purposes? While there is a lot to consider, speaking to a CPA on your business’s individual tax situation is always the way to go before making a final decision.
