A limited liability company, or LLC, is a form of business entity that was created by state laws. At first, it was not recognized by the Internal Revenue Service (IRS). Today, the IRS treats most LLCs as a partnership or sole proprietorship by default, though the members of an LLC can elect to be taxed as a C corporation. As a partnership or sole proprietorship, the LLCs net income or loss flows through to the individual members of the company. The company itself must file a form showing how these proceeds are distributed among its members.
An LLC can elect to be treated as a separate taxable entity by filing Form 8832 with the IRS. All members as of the date of the election must endorse the election. If the LLC was already considered a partnership or disregarded entity (sole proprietorship), this form can be used to have the business classified as an association taxable as a corporation. Eligible foreign entities must also file the form to designate their tax treatment, but the form should not be filed by an entity who's default classification is their desired status. The election can take place up to 75 days prior to filing, or as much as 12 months after.
The single owner of an LLC, unless he's elected for it to be taxed as a corporation, reports all the net income or loss of the business on his personal tax return. In most cases, this will be on Form 1040 Schedule C. If the business income is derived from real estate rental or royalties, Schedule E is used. Schedule F is used to report farming income. As a business owner, the single member will also have to file Schedule SE for self-employment tax.
If an LLC has more than one owner, called members, and it has not elected to be taxed as a corporation, it most likely is treated by default as a partnership. This means it must file Form 1065, U.S. Return of Partnership Income. In many ways, the first half of this form resembles an individual tax return and is fairly straightforward. The second half, however, concerns the assets and transactions of the partnership, analyzes its net income (or loss), recreates its balance sheet, and calculates the partners' distributive share.
Information Return (Member)
Each member of a multi-member LLC will have to receive an information return describing the income they've derived from the business during the tax period. The form for this is Form 1065-B (Schedule K-1). In many ways, this form resembles a 1099 or W-2, but is specially designed for income from a partnership. The business is responsible for issuing Form 1065-B to each member, and must attach a copy of each issued Form 1065-B to its own Form 1065 return. The members receiving a 1065-B must then use the information therein to complete their own individual tax returns, including Schedule C (or E or F) and Schedule SE (self-employment tax).
Information Return (Employee)
An LLC with employees other than members, has all the same reporting and withholding obligations as a corporation with employees. This means collecting W-4 forms and issuing W-2 forms for regular wages, salaries and tips. Independent contractors that are not regular employees should be issued a 1099. Additionally, an LLC might have tax obligations to a state in which it is located or conducts business.
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