Finance 3 Federal Taxation of Limited Liability Companies

 

The federal taxation of a limited liability company depends on whether the LLC is a single member LLC or a multiple member (having at least two members) LLC.

 

By default, a single member LLC is taxed as a disregarded entity. This means the LLC income and expenses are reported on the taxpayer's Schedule C, and Schedule SE, Form 1040. The taxpayer is deemed self employed subject to self employment tax and will be required to make quarterly estimated tax payments to the IRS.

 

A single member LLC may elect to be treated an as S corporation by timely filing Form 2553. This means the LLC must file Form 1120S. The owner (LLC Member) is deemed an employee of the S corporation and not a self employed individual. As an employee, the owner (LLC Member) is required to take reasonable compensation and file and pay all reportable federal and state payroll taxes.

 

By default, a multiple member LLC is taxed as a general partnership. This means the LLC must file  Form 1065. The owners are not deemed employees of the LLC. Each general partner owner (LLC Member) is subject to self employment tax on their ratable share of the net profits of the partnership and required to make quarterly estimated tax payments to the IRS.

 

A multiple member LLC may elect to be treated as an S Corporation by timely filing Form 2553. This means the LLC must file Form 1120S. The owners (LLC members) are deemed employee's and not self employed individuals. As an employee's, the owners (LLC members) are required to take reasonable compensation and file and pay all reportable federal and state payroll taxes.

This  article was written by  Donald M. Scherzi, CPA, CFP, LLC

 

 

Mike Lupo, SCORE Counselor

 

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