One of the most misunderstood business entities these days is the Limited Liability Company (LLC). I hear it all the time. “I’m taxed as an LLC.” But, the fact is there is no such thing as an LLC tax return. You get to choose how you want it taxed! But, here’s the rub. If you don’t choose, the IRS is going to choose for you. And, it may not be a choice you like.
If you have an LLC, especially a new one or one in which you started a new activity, now is the time to look at how you want your LLC to be taxed.
If there is only one member and you don’t choose what type of entity to be taxed as, you will be considered as a “disregarded entity.” If you have a business, that means you file as a Schedule C, Sole Proprietorship. If you have passive income, such as with rental properties, you file as a Schedule E. Both the Schedule C and E are part of a Form 1040. In some states, there is a concern that the disregarded entity doesn’t really give you any asset protection. Beware! Check your entity choice with your Tax Strategist to make sure you have the right choice for the state in which you live.
If you have more than one member and you don’t choose what type of entity to be taxed as, you will be taxed as a partnership (Form 1065).
Both a single member and multi-member LLC can elect to be taxed as an S Corporation or a C Corporation. But this is not something you can do at the same time you apply for your business’s Federal Tax ID Number. There is a separate paper filing you need to make with the IRS to complete your tax election.
Choose wisely! The right tax structure can save taxes and the wrong one can cost you a lot in wasted time, revised filing costs and taxes.