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How are LLCs taxed?

Limited Liability Companies (LLCs) are flexible business entities that offer a choice in how they are taxed. An LLC can be taxed as a disregarded entity, a partnership, an S Corporation, or a C Corporation. The default tax treatment depends on the number of members (owners) and the elections made by the LLC. Here's an overview of how LLCs are taxed:

Single-Member LLC (Default Tax Treatment):

Disregarded Entity: By default, a single-member LLC is treated as a disregarded entity for federal tax purposes. This means that the LLC itself is not taxed at the federal level, and all profits, losses, and deductions flow through to the single member's individual tax return (Form 1040).

Multi-Member LLC (Default Tax Treatment):

Partnership: By default, a multi-member LLC is treated as a partnership for federal tax purposes. Like a single-member LLC, a partnership itself does not pay federal income tax. Instead, profits, losses, and deductions pass through to the individual members, and each member reports their share on their individual tax return.

Elected Tax Treatment - S Corporation:

S Corporation Election: An LLC, whether single-member or multi-member, can elect to be treated as an S Corporation for tax purposes. This election must be made by filing Form 2553 with the Internal Revenue Service (IRS).

Pass-Through Taxation: Similar to a partnership, an S Corporation does not pay federal income tax at the entity level. Instead, profits and losses pass through to the individual shareholders, and each shareholder reports their share on their individual tax return.

Wages and Distributions: Shareholders who actively participate in the business may receive a combination of wages and distributions. Wages are subject to employment taxes, while distributions are generally not subject to self-employment tax.

Elected Tax Treatment - C Corporation:

C Corporation Election: An LLC can elect to be treated as a C Corporation for tax purposes. This election is made by filing Form 8832 with the IRS.

Corporate Taxation: As a C Corporation, the entity itself is subject to federal income tax on its profits. Additionally, shareholders are taxed on any dividends received from the corporation. This results in potential double taxation—once at the corporate level and again at the individual level when dividends are distributed.

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