Understanding the Taxation of a Professional LLC

Understanding the Taxation of a Professional LLC

A professional limited liability company (PLLC) is a popular business structure among professionals such as doctors, lawyers, and accountants. While it offers personal asset protection, understanding how a PLLC is taxed is crucial. This article will explore the different tax options available to PLLCs and how they are regulated by state laws.

Considered Partnership

A PLLC with multiple members is treated as a partnership for tax purposes by the Internal Revenue Service (IRS). This means that the profits generated by the business are not taxed at the LLC level. Instead, they pass through to the individual members, who report them as personal income on their individual tax returns. However, the PLLC itself is subject to employment taxes.

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Individual Reports

As a partnership PLLC, it is necessary to file a Form 1065, Return of Partnership Income, which provides information about the PLLC’s income, deductions, and any profit or loss. This form is purely informational, and no taxes are assessed at the PLLC level. Each member of the PLLC receives a Schedule K-1, which shows their share of the profits or losses. They must report this information on their personal tax returns and pay self-employment taxes on their share of the profits.

S Corporation

A PLLC also has the option to elect S corporation status for tax purposes. To do this, the PLLC must file a Form 2553 to change its tax status from a partnership. As an S corporation, the PLLC files a Form 1120S corporate tax return, which details the income, expenses, and other aspects of the business operation. The earnings for individual members are reported as either wages or dividends, depending on their type of work and percentage of ownership. These earnings are then taxed as personal income.

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C Corporation

Alternatively, a PLLC can choose to be treated as a C corporation for tax purposes. This option is similar to that of a formally incorporated business. The PLLC files a standard Form 1120, Corporate Income Tax Return, and pays taxes at the regular corporate tax rate. Unlike an S corporation, a C corporation retains its earnings and does not distribute them to members for personal taxation. Instead, members are taxed on what they receive as corporate employees or the dividends they receive as shareholders.

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In conclusion, understanding how a professional LLC is taxed is essential for PLLC owners. Whether it is treated as a partnership, S corporation, or C corporation, each option has its own tax implications. By familiarizing themselves with the different tax options and complying with state regulations, PLLC owners can make informed decisions about their business structure and taxation strategy.

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