Frequently Asked Questions

How are single owner LLCs and multi-owner LLCs treated for tax purposes?

The tax treatment of Limited Liability Companies (LLCs) varies depending on the number of owners. Single-owner LLCs are treated as sole proprietorships for tax purposes. This means that the owner reports all income and losses on their personal tax return, specifically on Schedule C of Form 1040. Even if profits remain in the company bank account at the end of the year, they are still subject to income tax. On the other hand, multi-owner LLCs are viewed as partnerships by the Internal Revenue Service (IRS). Each member must receive a Schedule K-1, which details their share of the LLC's profits and losses, known as distributive shares. These shares are usually distributed based on each member's percentage interest in the business, but a different structure can be set up, known as a special allocation. Regardless of the distribution method, members are required to pay taxes on their entire distributive share, even if the LLC didn't distribute the money.