Frequently Asked Questions

How does the IRS allow LLCs to choose their tax status and what are the filing requirements?

The Internal Revenue Service (IRS) provides flexibility to Limited Liability Companies (LLCs) in choosing their tax status. An LLC can opt to be taxed as a partnership, sole proprietorship, or corporation. Single-owner LLCs are treated like sole proprietorships, while multi-owner LLCs are considered partnerships by the IRS. All income and losses must be reported on the 1040 Schedule C. LLCs that retain a significant portion of their profits may benefit from corporate tax status. To be taxed as a corporation, LLCs need to file IRS Form 8832, Entity Classification Election, and select the "corporate tax treatment" option. However, this choice comes with the potential issue of double taxation, where the company pays the 21 percent corporate tax and members pay tax on individual dividends at rates for capital gains. LLCs are considered "pass-through entities", meaning profits and losses are reported by individual members on their personal tax returns, rather than being paid by the business. Each LLC member must receive a Schedule K-1, which itemizes profits and losses, and members pay taxes based on their share of these profits and losses.