Limited Liability Company (LLC)

How It's Taxed

The tax classifications available to an LLC vary based on the number of members, their relationship and the formation or residency state. Unless an LLC elects to be taxed as a corporation, profits and losses with be passed through to the members in accordance with their percentage ownership interests. The LLC is does not pay taxes as an entity at the federal level.

A single member LLC is automatically treated as a disregarded tax entity, the same as a sole proprietor, giving it pass-through tax treatment. However, a single member LLC may choose to be taxed either as a C Corporation or an S Corporation. This may be done to avoid unfavorable tax treatment in the formation state for an LLC that doesn’t apply to an entity taxed as a corporation. Also, a single member LLC would enjoy the simplicity of the LLC formation but choose to be taxed as an S Corporation to be able to receive a portion of the profits of the business in the form of a salary and a portion as a distribution that is not subject to self-employment taxes.

A multiple-member LLC is automatically taxed as a partnership. A general partner’s allocable share of partnership income is typically self-employment income, which is subject to self-employment taxes.

When an LLC is taxable as a partnership, a member’s eligible share of income may be treated one of three ways: (1) as net earnings from self-employment, (2) as salary or wages, or (3) as distributable shares of partnership income. Self-employment income incurs an additional tax of 15.3 percent.