LLC taxes

LLC taxes are treated like partnership taxes. Because an LLC taxation is as a partnership, the LLC files standard partnership tax returns (IRS tax Form 1065 and Schedules K) with the IRS and state, and the LLC owners pay LLC taxes on their share of LLC profits on their individual income tax returns.

Each owner gets a Schedule K-1 from the LLC, which shows the owner's share of LLC profits and deductions. The owner attaches the K-1 to her individual income tax return.

Sole owned LLC reporting LLC taxes on Schedule C

A sole owned LLC is treated as a sole proprietorship for tax purposes. The owner of the LLC includes profits or losses from LLC operations, as well as deductions and credits allowable to the business, on a Schedule C included with the owners' individual income tax returns. In essence, for a sole LLC owner, the Schedule C works much like the K-1 schedule filed by the owners of a co-owned LLC.

LLC taxes and corporate tax treatment

If a sole owner or multi owner LLC elects corporate tax treatment, the LLC is treated and taxed as a corporation, not as a sole proprietorship or partnership. The LLC files corporate income tax returns, reporting and paying corporate income tax on any profits retained in the LLC. The LLC members report and pay individual income tax only on salaries paid to them or distributions of LLC profits or losses.

Incorporating an LLC

However, as is true for partnerships, LLC that may benefit from electing corporate tax treatment normally decide to go ahead and incorporate. By doing so, they get corporate tax treatment plus the other advantages the corporation provides, such as access to capital, capital sharing with employees, tax deductible employee fringe benefits and built in management formalities.

How to form an LLC or limited liability company depends on the state laws of the state you want to form your LLC corporation in. Some states laws impose an annual fee or tax on LLC, in addition to individual income tax that owners pay on the LLC profits allocated to them each year.