When it comes to tax filing, it is important for limited liability companies (LLCs) to understand their obligations. Depending on the number of members and the desired tax treatment, an LLC may need to file separate federal and state tax returns. This article will provide an overview of the different tax filing options available to LLCs.
Filing as a Single-Member LLC
For single-member LLCs, there are two options for tax filing. The first option is to be treated as a disregarded entity, where no separate tax return is required. Instead, the LLC’s business income and expenses are reported on the individual owner’s tax return. The specific schedule to be used depends on the type of business. However, it is important to check with the state agency for any separate state filing requirements. The second option is to elect corporation status by filing Form 8832. If no election is made, the single-member LLC automatically defaults to a disregarded entity.
Filing as a C Corporation
LLCs with more than one member must file separate federal and state tax returns. By electing to file as a C corporation on Form 8832, the LLC can file Form 1120, U.S. Corporation Income Tax Return, and the appropriate state corporation tax return. In a C corporation, all profits and losses remain within the corporation and are taxed at corporate rates. There is no flow-through of income or losses to the individual members’ tax returns.
Filing as an S Corporation
LLCs, whether single-member or multiple-member, can also elect to be treated as an S corporation. This requires filing Form 8832 to elect corporation status and Form 2553, Election by a Small Business Corporation, to elect S corporation status. By doing so, the LLC can file Form 1120S, U.S. Income Tax Return for an S Corporation, and the appropriate state S corporation tax return. An S corporation is a flow-through entity, meaning that the income and losses are passed through to the individual members. Each member receives a Schedule K-1, which reports their share of the income, gains, credits, deductions, and losses. These amounts are then reported on the members’ individual tax returns and taxed at their individual rates. However, it is important to note that S corporation losses are subject to certain limitations.
Filing as a Partnership
If an LLC has multiple members and does not make any election, it is automatically treated as a partnership for tax purposes. As a partnership, the LLC must file Form 1065, U.S. Return of Partnership Income, and the appropriate state partnership income tax return. Similar to an S corporation, the members’ share of income, gains, credits, losses, and deductions are reported on Schedule K-1 and entered on their individual tax returns. Partnership losses are subject to various limitations, including basis limitation, at-risk limitation, and passive income limitation.