Income Taxes for LLC Businesses

Business owners often choose to protect themselves for legal purposes by forming a Limited Liability Company (LLC). An LLC is a state-defined legal structure that business owners use to protect their personal assets in case their business is sued, or another event exposes them to financial liability. However, forming an LLC doesn’t automatically tell the business owner(s) – or the tax preparer – how the LLC operates for tax purposes

How an LLC files its business income taxes depends on the number of business owners and a few other considerations. Determining the best option depends on your objectives and circumstances. The decision can get complicated, so it’s probably a good idea to get professional advice. Here are the basics to get you started.

Income taxes for LLC businesses can be filed in one of three different ways:

  1. Sole Proprietorship

An individual business owner who has not incorporated is, by default, a Sole Proprietor. This is the simplest tax filing option. A Sole Proprietor reports income and expenses on a separate form filed with the owner’s individual income tax return, IRS Schedule C, “Profit or Loss from Business.” Net business profits are subject to income tax and to Medicare and Social Security taxes (i.e., 15.3% of net business profit).

  1. Partnership

Two or more individuals in business together without incorporating have, by default, formed a Partnership. Partnerships are considered a separate tax entity and are required to file a separate income tax return, IRS Form 1065, “U.S. Return of Partnership Income.” Partners receive an IRS Form K-1 for everyone’s pro-rata share of non-wage income, based on the operating agreement. 

  1. Subchapter S Corporation

Businesses with one to 100 domestic owners can take the Subchapter-S election. Sub-S Corps are considered a separate tax entity and are required to file a separate income tax return, IRS Form 1120S, “U.S. Income Tax Return for an S corporation.” Shareholders receive an IRS Form K-1 for their share of non-wage income, based on the operating agreement. Owners are considered employees, must be paid wages, and get a W-2.

How an LLC files its business income taxes depends on several considerations, including the number of business owners. Determining the best income tax option for your LLC isn’t easy. You’ll probably want more information, and some professional advice. Check the IRS website for income tax options and resources for business owners at https://www.irs.gov/businesses.