LLC Tax Designations

Sole Proprietorship: As the name suggests, this is the simplest IRS designation for your LLC, and is only available if you are the only member (owner) in the company. If you’re a sole prop, the LLC acts as a completely disregarded entity in the eyes of the IRS, which makes filing taxes extremely simple. Unless you’ve elected to be an S Corp to pay yourself a salary, filing as a Sole Prop single-member LLC is usually the best and easiest option come tax season. Disregarded entities (Sole Props) simply have to file a Schedule C form with the IRS outlining revenue, expenses, and the profit/loss, 100% of which is passed on to you as the only owner. Because of this, any income from a sole prop will be subject to self employment tax (FICA). Turbotax has this process built in and it’s super streamlined to use (I’ve used this every year I’ve been filing taxes for one income stream or another). 

Partnership: If your LLC has multiple owners, the default tax designation without any other elections is Partnership. Similar to Sole Proprietorships, LLC’s taxed as partnerships don’t pay any kind of corporate taxes and pass their profit and loss onto the owners proportional to their ownership interests. Partnerships can be tax advantageous if you have investors as silent partners, as they may be able to write off losses if it takes the company a while to become profitable. When preparing taxes for a partnership, the LLC must file form 1065 with the IRS, which outlines the business revenue, expenses, and profit/loss for the year. Then, each owner or “partner” will need to receive a Schedule K-1 outlining their share of the total profit/loss. It’s important to note that partnership earnings are also subject to self employment tax, just like a sole prop. For those filing themselves, unfortunately you can’t use the browser version of turbotax to do the 1065 and K-1’s. Instead, you need to pay for that year’s version of TurboTax Business, which is a program you need to install on your computer and costs around $190 (found here). You can actually import your accounting directly from Quickbooks into TurboTax Business, which will save you some time filling out the forms. Overall, it’s a pretty simple experience not dissimilar to the browser version for your personal taxes. 

S Corp: Before we get into it, it’s important to note that different states have different deadlines for electing to be an S-Corp. If it’s already tax season, it’s already too late. Most states give you around the first quarter of the year to elect for S-Corp status as an LLC for that taxable year, so be advised, this is something that needs to be done ahead of time. As far as tax season is concerned, states also have different rules regarding corporate tax rates for S Corps. A corporate tax is an income tax that your company pays before any profits are distributed, and then those distributions are taxed again, resulting in double-taxation. Luckily, there is 0 federal corporate income tax for S Corps, but many states do levy some S-Corp corporate tax, usually similar to or a fraction of the regular state corporate income tax for C Corps. For more information on if an S-Corp election is the right move for your business, check out the “S-Corp” section under “Entity Types” in this course. 

C Corp: In short, there’s not really a reason you should ever elect to have your LLC taxed as a C Corp. If you think you might want to, just create a C Corp… But that’s outside the scope of this course for now.