Question:
I am considering creating an LLC for my business but don’t understand how it and I would be taxed. Will you explain?

Answer:
With a Limited Liability Company (LLC), you have a tremendous amount of flexibility on how the entity is taxed. If the LLC has a single member, the default is for it to be considered a disregarded entity and for the LLC’s income and expenses to become the income and expenses of the LLC member. If the LLC member is an individual, the LLC’s income and expenses would be reported on Schedule C of the member’s Form 1040.

If the LLC has multiple members, the default is for it to be treated as a partnership. As a result, the LLC would have to file a Form 1065 annually and to issue each member a Form K-1 (Form 1065), which would list each member’s share of the LLC’s income and expenses. Each member would then be required to report his or her respective share of the LLC’s income on the member’s tax return.

An LLC can also ELECT to be treated as an S corporation. This requires filing Form 2553 with the IRS by the applicable deadline. If the LLC is treated as an S corporation, the S corporation would file Form 1120-S with the IRS and issue each LLC member a Form K-1 (Form 1120-S). Each member would then be required to report his or her respective share of the LLC’s income on the member’s tax return. The LLC may also issue a Form W-2 to the member of the member is an employee of the LLC.

An LLC can also ELECT to be treated as a C corporation. This requires filing Form 8832 with the IRS by the applicable deadline. In this case, the LLC would file Form 1120 with the IRS and would be taxed on all of its taxable income. The LLC would issue a Form 1099-DIV for dividends paid to LLC members (which would get reported on the members’ tax forms) and a Form W-2 if the member is an LLC employee.

The question of how you want your LLC to be taxed can be a complicated one. If you have any other questions, please let us know.