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A limited liability company (LLC) is one of the most common types of business entities around. Despite their popularity as a business structure, limited liability companies do not have their own tax classification. Depending on how many members are in the LLC, your business can be taxed in different ways. As a business owner, this could drastically change how much taxable income you have at the end of the year. Consider hosting a small business conference and talking to your employees about which option they think would work best. In this post, we will cover the different LLC tax classification options you can choose from.
Single-Member LLC Tax Classification
For most single-owner businesses, the single member LLC is taxed as a sole proprietor business. The LLC is a pass through entity so the income will transfer over to your personal income return. Moreover, this classification is the default when you form an LLC company as a single member. If you would like to be taxed as a sole proprietorship, this classification could work for you. It is a common first step for businesses that are changing from a DBA to LLC.
Multi-Member LLC Tax Options
Secondly, if you form an LLC with multiple members, the default classification is a partnership. Under a multi-member LLC formation, all the members are taxed like partners in a partnership entity. In this situation, you might have to file an additional document, For 1065: Partnership Return of Income, to the IRS. Since the LLC does not pay taxes, the net income or losses are transferred to the members. You should have your accountant ensure that all the income in a partnership taxation are calculated properly using this LLC classification.
Electing To Tax LLC As S Corp
Next, you can elect to have your LLC tax classification to be treated as an S-corporation. Typically, this works for single member or multi-member LLC businesses without all the additional work of maintaining S-Corp status. You have sufficient flexibility to distribute profits or losses to owners. However, you would probably have to pay yourself a salary at the advisement of a tax professional or accountant. If you would like to take the best of both worlds between an LLC vs S-corp, this LLC tax classification could be perfect for you.
File An LLC Taxes Like A Corporation
Additionally, you can elect to tax LLC entity like a C Corp. Using the Form 8832, an LLC can be treated as a C corporation for tax classification purposes. This is less common since the LLC will no longer be treated as a pass through entity. It will be regarded as a separate entity, which could result in double taxation. You could end up paying taxes at the corporate level and then again on the corporate dividends. Although it is a less popular option, you can still consider this LLC tax classification with your financial advisors if needed.
Optional Election
Finally, you can tax your LLC with optional election options. File a 8832 form through the IRS. This Entity Classification Election allows you to change from default tax classification options at any time. In fact, this form also enables you to revert back to the default classification if needed to support business circumstances after estimating taxes to save money. However, your LLC can only switch tax classifications once every 60 months after the first election. Of course, consider an optional election plan when choosing a tax classification option for your LLC.
Of course, after deciding on your preferred LLC tax classification option, you may ask about other tax related responsibilities such as
What Should I Avoid When Preparing To File Business Taxes
How Can I File Late Taxes Online And Regain Control Of My Finances
Is It Worth Getting An Accountant For My Small Business Taxes
How Can I Do My Taxes Online To Maximize Deductions
How Can I Reduce Taxed To Make Business Finances Sustainable
If you decided to form an LLC, you have access to many different types of tax classifications. This is one of the major benefits of an LLC structure. As a single member LLC, you can be taxed as a sole proprietor or corporation. In a multi-member limited liability company, you can classify the company as a partnership or corporation for tax purposes. Clearly, all of these types of classifications can have various impacts on your tax obligations. Ensure that you have proper tax planning strategies in place and know what expenses are tax deductible when electing your LLC tax classifications.
