The tax return that an LLC has to file all depends on the LLC in question. Some LLCs are set up differently, and that organization structure dictates how the federal government expects you to file your tax return.
If you are a single-member LLC, then your LLC will have only one tax return to file. This is because you are considered a disregarded entity for tax purposes. That means you will be treated the same as a sole proprietorship, or an unincorporated business run by one person.
Your tax return will be filed on Form 1040. This return will include your personal information, all of your income, your deductions, any employment situations, any childcare deductions and anything else that would be on your typical individual tax return.
Your business information will be attached to your personal return on Schedule C. This schedule is going to list out all of your business information, income, expenses, depreciation, etc. Then, those amounts are going to roll into your taxable income to determine your total amount of taxes due.
Are you wondering why the government treats your single-member LLC like a sole prop?
Me too! That’s a question I wish I could answer, but who knows why the government does anything these days?
Regardless of why, you definitely have the simplest tax situation to handle, and that can be a good thing. You do still need to have accurate financial records to make the process run smoothly though. This is especially true since your business is an LLC regardless of how it is treated for tax purposes. Keeping accurate financials is part of running your LLC so it’s always wise to do so.
And what about your liability protection?
Have no fear! Your tax filing status has nothing to do with how your business was setup in your state. You will still have the liability protection afforded to you by the LLC in your state regardless of your federal tax treatment.
So, what tax return does a multi-member LLC have to file?
If you have at least two members in your LLC, then you have to file two separate returns. Your business tax return is on Form 1065. Then, you will file your normal personal tax return on Form 1040 including some of the information from your business return.
Your business will be treated like a partnership for federal tax purposes, which is the default situation. Why you ask?
Once again, who knows why the government makes any decision, but it has to do with ease of use.
It was easier for LLCs to be taxed like other taxable business types than to create an LLC return. This is especially true since LLCs are all different, and depending on the state, they may have different requirements as well.
One very important thing to note is that the multi-member LLC tax return is for informational purposes only. This means that no tax is actually paid when the business return is filed.
Since LLCs are pass-through entities, the business return will show all of the amounts allocated to each member. Then, each member will include their income amounts on their personal tax returns via a document called a Schedule K-1. The actual business taxes are then paid by each member.
Since multi-member LLCs have two returns to file: business and personal, it is imperative that you keep accurate financial records just like a single-member LLC.
What else can you do?
Well, the IRS will also allow your LLC to make a special Entity Classification Election via Form 8832. This election would mean that you could be treated as a corporation for tax purposes.
From there, you could also choose to be treated as an S corporation if you want to make another election. This can be done using Form 2553.
Wrapping It Up
So, whether or not you’re a single- or multi-member LLC, you’re still an LLC. You should operate as one and focus on meeting the tasks required by your state.
Single-member LLCs definitely have less complexity in their tax filings, but in the end, it’s really all the same. Business net income is taxed at the personal level in each situation, and the tax burden falls to you, as a member in an LLC.
Note: This blog post is meant for educational and informational purposes only. Please contact a tax or accounting professional if you have specific questions about what this means for your business before taking any further action.