A limited liability company (LLC) is a legal entity that is used to conduct business activity. An LLC can enter into contracts, own property, and be a party to legal proceedings.
The benefit of using an LLC to conduct business activity is that the owners of the LLC, called members, are generally protected from the liabilities of the LLC.
LLC Tax Basics
Single Member LLC
A single member LLC is an LLC with one owner, member. For state law purposes of entering into contracts and owning property, the LLC is a separate legal entity from its owner.
However, for income tax purposes, the LLC is disregarded, and the member reports the income and deductions on Schedule C of his or her personal income tax return as if the owner engaged in the business activity directly.
A multi-member LLC is an LLC with more than one member. It is a separate legal entity from its owners.
For income tax purposes, the LLC is a Partnership. It reports its income and expenses on Form 1065, Return of Partnership Income.
A partnership is a pass-through entity. The Partnership generally pays no taxes on its net income. Instead, the partnership provides its members a Schedule K-1, which lists the members share of partnership income and deductions. The members report the income and deductions from the K-1 on their individual income tax returns.
Electing Corporation Status
As discussed above, by default, single member LLCs are disregarded entities and multi-member LLCs are partnerships. However, an LLC can elect to be taxed as a corporation.
C corporation Election
An LLC may elect to be taxed as a C corporation by filing Form 8832 with the IRS. Form 8832 must generally be filed by March 15 of the year the election is made.
A C corporation files an annual Form 1120, U.S. Corporation Income Tax Return, to report its income and deductions. The C corporation must pay income tax on its net income.
S corporation election
The LLC may also elect to be taxed as an S corporation by filing Form 2553 with the IRS. Form 2553 must generally be filed by March 15 of the year the election is made.
An S corporation files an annual Form 1120S, U.S. Income Tax Return for an S Corporation to report its income and deductions. the S corporation does not pay income tax on its net income. Instead, it is a pass-through entity similar to a partnership.
The S corporation provides its owners a Schedule K-1 reporting their share of S corporation income and deductions. The members report the income and deductions from the K-1 on their individual income tax returns.