Small Business Cents

[#1]

Tax requirements are constantly changing and different laws and forms apply to different business structures.  This quick guide provides information to understand the basics on filing taxes for your LLC.

First, some background on Limited Liability Companies (LLC): An LLC is a relatively new, hybrid-type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.  LLC owners are called members and there is no maximum number of members per LLC.

The federal government does not recognize a Limited Liability Company as a classification for federal tax purposes.  LLCs must file tax returns as a corporation, partnership, or sole proprietorship.  Several factors determine which business type your LLC should be classified as for federal tax purposes:

• Certain LLCs are automatically classified and taxed as a corporation by federal tax law. LLCs that are not automatically classified as a corporation can choose their business entity classification. To elect a classification, an LLC must file Form 8832. This form is also used if an LLC wishes to change their classification status. Tip: The IRS offers guidance on how to determine which classification you should file.

• LLCs that do not elect a classification, and are not automatically classified as a corporation, are classified according to federal default rules. These rules are defined by the number or members in an LLC.

Tax elections are in effect on the date the LLC enters on line 8 of Form 8832.  If no date is entered, the election is in effect as of the form's filing date.  Elections cannot take place more than 75 days prior to filing Form 8832.   It's also important to note that you cannot make the election effective for a date more than 12 months after filing Form 8832.

If an election is the "initial classification election," rather than a request to change an entity classification, there is relief available for a late election. See instructions for Form 8832 for more information.

LLCs should file tax forms according to their new federal tax classification.  The following forms should be filed depending on your classification:

• Corporation - Form 1120 (U.S. Corporation Income Tax Return)
• Partnership - Form 1065 (U.S. Return of Partnership Income)
• Sole Proprietorship -
  • Form 1040 Schedule C (Profit or Loss from Business - Sole Proprietorship) 
  • Form 1040 Schedule E (Supplemental Income or Loss)
  • Form 1040 Schedule F (Profit or Loss from Farming)
  • Form 1040 Schedule J (Income Averaging for Farmers and Fisherman)
  • A Schedule SE, Self-Employment Tax may be required if your LLC is filing as a sole proprietorship and its net income is more than $400.  Regardless of your classification, it is important to check with a tax lawyer, accountant, or small business expert to make sure you're filing all of the correct forms. 

Special considerations and Extra Help
If you decide to convert your business into an LLC you may affect your tax requirements. For additional information on the kinds of tax returns to file, how to handle employment taxes and possible pitfalls, refer to IRS Publication 3402 Tax Issues for Limited Liability Companies.

Still confused?  Find tax help and training resources on Business.gov or ask a question in the Community. 

Additional Resources:

• Forms for Limited Liability Companies
• Forming a Limited Liability Company
• Frequently Asked Questions Related to LLCs

[#2]

LLC taxation is different from that of a corporation or other business entities in a number of ways. First, the LLC does not pay federal taxes on its earnings through the year. Do not misconstrue that as reading “tax free” because that is not true. However, the way that the taxes are paid is different. A corporation is a separate tax entity and will pay taxes as a whole with the corporate members paying taxes on their individual earnings as well. A LLC is a pass through entity so there are no taxes levied on it.  Limited Liability Company taxation does not tax the company because the earnings do not technically stay with that company; they pass through to the business owners whether there is one, two or fifteen of them to deal with.  

Corporate taxation is different from LLC taxation in other ways as well. For instance, once the corporate taxes have been assessed, the amounts that are levied against the corporate members might be very different as well. Each corporate member may pay a different amount of tax because their individual earning level will be different. For the LLC all of the owners will get a share that is equal to the amount they have invested in terms of both time and money and will be equally taxed for those amounts by the government. How those taxes are assessed and what forms will need to be filed is an individual thing and has many factors that must be figured before a definitive answer can be devised. It is best to consult a CPA who can explain these figures more clearly.

For more info visit http://llctaxes.com

[#3]

A corporation is a separate tax entity and will pay taxes as a whole with the corporate members paying taxes on their individual earnings as well.