The short answer is – it depends on the tax structure the owners choose whether or not LLC’s get taxed. The long answer will follow below. The most important thing to know about LLCs and taxes is that the company’s owners or members can decide how they want to be taxed by the IRS. It’s important to choose the right tax structure for the LLC as this can affect the business greatly. Below we explain what an LLC is as well as the different tax structures entrepreneurs can choose from and which tax structure is suitable for different types of LLCs.
What is an LLC?
An LLC is a limited liability company. This means that LLCs are separate entities to their owners or members. The reason why LLC’s are so popular and a great choice for new business owners is that they offer protection to the owners financially. Owners of an LLC are not personally liable for the businesses debts or judgements. When forming a new LLC, the business owner needs to file an Article of Organization with the state. An LLC business structure is still quite flexible, in that the business owners can choose how their business should be taxed. Below are the four options that can be considered.
Single-Member LLC Taxes
The state considered a single-member LLC as disregarded from tax. Pass through taxes will be applicable. This means that the sole business owner will declare the income and expenses of the business as his or her own. This structure is exactly how a sole proprietorship will be taxed. The business owners have to pay self-employment taxes if they are actively part of the trade and business of the company. Even though the IRS disregards this entity for tax purposes, business owners still get the limited liability protection that a sole proprietorship does not offer.
Multi-Member LLC Taxes
This tax option is suitable for LLC’s with two or more members. The members will be taxed the same way partnerships are taxed, however the owners can choose to be taxed as a C or S-corporation. Each individual partner gets taxed on their share of the profits made by the LLC. This is another structure where the LLC is not taxed, but the members of the LLC are taxed on the company income and expenses. Members will have to pay self-employment taxes if they are actively involved in the business and trade of the company.
LLC Taxed as a C-Corporation
Choosing to be taxed as a C-corporation is best suited for companies wanting to keep profits within the business, rather than distributing it to members each year. With this structure, the LLC is taxed on its profits. The business owners will not pay taxes on the LLC’s profits. The business owners will only pay tax on dividends distributed to them. The LLc will be liable to pay payroll taxes if members of the business earns a salary or wages from the company. Self employment taxes are not applicable to this taxation structure.
LLC Taxed as an S-Corporation
With this tax structure the businesses profits are not subject to income tax. The LLC members are taxed on the shares they have on the companies profits. Self-employment taxes are not applicable, however the company will pay payroll taxes for members who earn a salary or get wages from the LLC. This is best suited for businesses who earn significant income and make big profits.
LLC Formed for Passive Activity
When an LLC is formed for passive income self-employment taxes are not applicable to that LLC. the IRS considered passive income as any income made from real estate investments or Airbnb type income. This income has to be reported separately as all losses are limited.
TRUiC gives great information on this website, providing business owners with which forms to fill out for the IRS, how to do one’s individual taxes, what the state and federal tax laws are surrounding LLCs as well as which business expenses are deductible from tax. As a new business owner, make sure to do a lot of reading and research before choosing a tax structure for your business. Also look at the businesses needs and how the formation of the LLC is set out.