Cotner, Cooley. Clark & Sharp, CPA
Athens Ohio CPA Firm

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How will (or should) my Limited Liability Company (LLC) be taxed?

So, you're doing some research about what form you want your business to take, and you have decided that a limited liability company (LLC) will work best for you and your partners.  Now the question is - how are these things taxed?  Hoping for some some simple guidance, you call your accountant and ask him.  He gives you his typical CPA stock answer -  "It Depends".  (Don't you wish you could just get a straight answer out him for once?)

Well even though "it depends" sounds evasive (it actually is the answer to 99% of all tax questions), it is the correct answer in this case, 

So, let's break it down a little further.  In this case the answer depends on any tax only elections that you may make and the number of members (owners) in your LLC.  The decisions only affect the taxation of the LLC, and not the legal aspects of the incorporating as an LLC.

  • If you make no special elections regarding taxes with the IRSThe IRS considers LLCs as a "disregarded entity".  In other words, they are going to pretend like the LLC does not exist.  So, at this point we look to the number of owners to determine how it will be taxed:
    • More Than One Owner - In this scenario, the LLC will be treated for tax purposes as if were a partnership.  So, all income will be reported on Form 1065 and ultimately will end up on the tax returns of the owners.  The owners will also not be able to be treated as employees of the LLC.
    • Single Owner - In this case, all income will be taxed to the owner s if the LLC did not exist, and reported on her individual tax return.
       
  • You decided you would like your LLC taxed in a different manner:  Good news!  You have more business tax options at this point
    • Decide to be taxed as a corporation.  In tax circles we refer to this as a "C corporation", meaning that the LLC is considered a taxpayer separate and apart from the owners, and would be subject to the flat corporate tax rate on profits of 21%.  
    • Decide to be taxed as an "S corporation".  S corporations are the most popular business form for small businesses.

Remember on that action is required on your part if you wish to be taxed as a corporation.  There are filings that are required with the IRS and there are time deadlines in doing so.

So, with all of the choices that are available - what is ultimately the best choice for YOUR business?

My answer is an emphatic "It depends",