How Is a LLC Taxed?

Understanding LLCs

A limited liability company (LLC) protects personal assets. If the business has issues, your personal assets are safe. Setting up an LLC shields assets from business debts and lawsuits. LLC owners are not personally liable for company debts. Members manage LLCs jointly. Differing ideas on operations or profit distribution cause conflict.

LLC Taxation

For tax purposes, the IRS treats an LLC as a pass-through entity, which means that an LLC doesn’t pay taxes on business income. Instead, the income and expenses go directly on the member’s tax return. If an LLC would like to be taxed as an S-Corporation, it must file Form 2553. The owner of an LLC taxed as an S-Corp will pay less self-employment taxes on profits than if taxed as a Sole Proprietorship.

LLC owners use Form 1120 to report income, gains, losses, deductions, and credits to calculate tax liability. An LLC can also file Form 2553 and elect to be taxed as an S corporation, allowing it to pass income, credits, and deductions through to owners. If an LLC has multiple owners, it’s taxed like a partnership. Profits are split among members who each claim taxes as personal income.

Costs and Regulations

States regulate LLCs. The main LLC cost is the state filing fee. You can form one yourself or use a service. LLCs prevent double taxation and limit liability. But disputes between members are possible. Corporations limit liability; partnerships enable pass-through taxation. LLCs are hybrids, offering both flexibility in management and tax status.

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