Taxation Structures for LLC’s in the US

A Limited Liability Company (LLC) is a business structure allowed by state statute. Each state may use different regulations, which can be verified with the state directly if you are interested in starting a Limited Liability Company.

Owners of an LLC are called members. Most states do not restrict ownership, so members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit “single-member” LLCs, those having only one owner.

A few types of businesses generally cannot be LLCs, such as banks and insurance companies. Check your state’s requirements and the federal tax regulations for further information. There are special rules for foreign LLCs.

Classifications with IRS for Taxation Purposes

Depending on elections made by the LLC and the number of members, the IRS will treat an LLC as either a corporation, partnership, or as part of the LLC’s owner’s tax return (a “disregarded entity”). Specifically, a domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless requested to be treated as another format. For income tax purposes, an LLC with only one member is treated as an entity disregarded as separate from its owner unless chosen to be treated differently.

Listed below are the available options an LLC may be treated with the IRS as far as income will be taxed and its filing requirements for each.

  • Disregarded
    Single-member LLCs are taxed this way by default. The sole member pays income and self-employment taxes on the net business income, just like a sole proprietor.
  • Partnership
    This is the default treatment for multi-member LLCs. The LLC reports its income to the IRS, but the individual members themselves pay the income and self-employment taxes due on their share of the income.
  • S Corporation
    Single- or multi-member LLCs can choose this tax treatment if they qualify. This one works like the partnership tax treatment, but offers greater flexibility to minimize taxes. Under this structure other LLC’s nor Corporations can be the partners, only individuals. Another qualification for this taxation structure is the member must be US Resident, and non-resident aliens do not qualify from this tax treatment option.
  • C Corporation
    This last tax structure available to any LLC. However, there is a disadvantage where this tax treatment causes double taxation where the LLC pays its own tax at corporate tax rates, and members pay income tax on any distributions.

Establishing a Business Entity in the US is fast and simple, choosing the best tax structure could be tricky. By selecting the incorrect tax structure for your business or not being aware of tax filing requirements for such may add up fast and get extremely costly. For this we suggest you always consult with a tax professional to assure you make the best selecting for your project.


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