The LLC does not pay taxes. LLC owners report their share of profits and losses on personal tax returns. As "pass-through" entities, LLCs avoid "double taxation."
Taxation of LLC Profits
Opt for Pass-through Taxation
An LLC can choose to be taxed as a pass-through entity, where profits and losses pass through the business and are reported on the personal tax returns of the owners. This avoids double taxation on both the LLC and individual levels.
Key Concept: Pass-through Taxation
The key concept associated with the taxation of an LLC is pass-through. This describes the way the LLC’s earnings can be passed straight through to the owner or owners, without having to pay corporate federal income taxes first.
Tax Advantages
One of the biggest tax advantages of a limited liability company is the ability to avoid double taxation. The Internal Revenue Service (IRS) considers LLCs as “pass-through entities.” Unlike C-Corporations, LLC owners don’t have to pay corporate federal income taxes.
Avoiding Double Taxation
Unlike a corporation that pays taxes twice on the same profit, first as business income and then again as owner income, LLC shareholders are only taxed once on profits in their personal income.
Tax Classification
By default, a single-member LLC is taxed as a sole proprietorship, while a multi-member LLC is taxed as a partnership. However, LLCs can also elect to be taxed as an S Corporation or a C Corporation, which can change the way the company and its owners are taxed.
Reporting and Payments
For businesses with established revenue, requesting your LLC be taxed as an S-Corporation can save money on self-employment tax. However, it costs money to run an S-Corporation, so we recommend looking into this once your business is making about $70,000 net income annually, per Member.
Tax Filing for LLC Owners
As the sole owner of your LLC, you must report all profits (or losses) of the LLC on your 1040 tax return.