How Are Limited Liability Companies Taxed?

LLCs are known as a Pass-Through Entity by default.

When a business has more than one owner and is not classified as a corporation, it is characterized as a partnership for tax purposes and applies to Limited Liability Companies (“LLCs”). This means that the entity does not pay tax on its income, but instead, each owner must report on their own share of the entity’s income and loss on their own personal tax return. This not only ensures that the business income is taxed ONCE but allows the LLC to function as a conduit to pass income and deductions through to its owners (also referred to as “members” or “partners”).

An LLC taxed as a partnership must file Form 1065 to report income and deductions, showing each owner’s distributive share. The entity is generally not liable for paying the tax.

For Federal Tax purposes, single-member LLCs are disregarded as separate from the owner and treated as sole proprietorships when not elected to be treated as a corporation. These entities typically offer creditor protection without a separate tax return.

LLCs taxed as a Corporation.

As mentioned above, LLCs can elect to be taxed as a Corporation, either as a C-Corp or S-Corp. Federal regulations for C-Corps ensure that all income is taxed TWICE, at the corporate level and again when distributions are made to shareholders.

LLCs taxed as an S-Corp provide an added layer of liability protection with flow-through taxation of the partnership. They are not taxed separately from the owners and must file the Form 2553 to be elected to S-Corp taxation status. S-Corps are subject to added requirements to maintain this status, and it is often simpler for an LLC to remain in its original structure for taxation.

Contact a Florida business attorney today regarding these matters.

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