How LLCs are Structured and Taxed

By Greg Lindberg, 1800Accountant.com Writer

Before you receive the hard-earned title of being a newly crowned business owner, you must weigh the different types of business entities available to you. Each entity is designed uniquely when it comes to how the IRS treats it. Considering the tax obligations that apply to each entity is a must to make a wise business decision. 1800Accountant.com, one of MyCorporation’s partners, offers a few pointers to consider on how LLCs are structured and taxed.

A Limited Liability Company (LLC) is a business structure that is ideal for many small business owners. Individuals who own LLCs are known as “members.” A member may be an individual, a corporation, a separate LLC, or a foreign business entity. The advantage of an LLC is that there is no limit on how many members can be involved in it. Single-member LLCs, which only have one owner, can also exist.

When it comes to business taxes, an LLC is categorized as a “pass-through entity.” This classification means that all of the taxes, profits, losses, and deductions that result from the actions of the company pass directly through to the owners of the LLC. An exception to this rule is that the IRS can treat certain LLCs a little differently. An LLC can elect to be treated as a corporation. This assertion has to be made during the entity classification election by filing Form 8832: Entity Classification Election. The two options for the corporation route are choosing to be taxed as an S corporation or a C corporation. S corporations are considered pass-through entities in which business activities are passed to the personal taxes of their owners, which prevents double taxation. C corporations are taxed as separate business entities.

If an LLC does not elect to be treated as a corporation, the IRS will automatically treat a single-member LLC as a sole proprietorship and a multi-member LLC as a partnership. In these cases, the activities within the business are reflected on the personal tax returns of an LLC’s members. The LLC is considered a disregarded entity in these situations. Regardless of how an LLC chooses to be structured, owners who are actively engaged in these business entities are generally on the hook for paying self-employment taxes.

In terms of protection, there are some other benefits to running an LLC versus other business entities. As an LLC owner, you are only partially responsible for any unpaid debts or court judgments made against the business. In addition, the losses your company incurs are limited to your overall investment in the business as well. An LLC can also give your business more credibility as a formal venture compared to operating a traditional sole proprietorship or partnership. Plus, if you go with the corporation structure for your LLC, your personal assets will be protected from your business assets.

Overall, LLCs offer lots of flexibility for those who prefer having several options on how to run their businesses. This is why opting for an LLC may be a fantastic decision for you to make if you like having more control.

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