How LLCs Are Taxed: A Complete Guide

LLCs have unique tax flexibility. By default, they use pass-through taxation, but you can elect to be taxed as a corporation. Here's how it all works.

Default LLC Taxation

By default, the IRS doesn't recognize LLCs as a separate tax entity. Instead, LLCs are taxed based on their number of members:

• Single-member LLC: Taxed as a "disregarded entity" (sole proprietorship)
• Multi-member LLC: Taxed as a partnership

This is called pass-through taxation because business income "passes through" to the owners' personal tax returns. The LLC itself doesn't pay income tax.

Single-Member LLC Taxation

If you're the only owner of your LLC, the IRS treats it as a "disregarded entity." For tax purposes, it's as if the LLC doesn't exist. The business income and expenses are reported on your personal tax return.

How to Report

Report your LLC's income and expenses on Schedule C (Profit or Loss from Business), which attaches to your Form 1040.

What You Pay

• Income tax at your personal tax rate on net profit
• Self-employment tax (15.3%) on net profit

Quarterly Estimates

Since no taxes are withheld from LLC income, you'll likely need to pay quarterly estimated taxes to avoid penalties.

Multi-Member LLC Taxation

LLCs with two or more members are taxed as partnerships by default. The LLC files an informational return, and each member reports their share on their personal return.

How to Report

1. The LLC files Form 1065 (U.S. Return of Partnership Income)
2. Each member receives a Schedule K-1 showing their share of income, deductions, and credits
3. Members report K-1 information on their personal Form 1040

Important Dates

• Form 1065 due: March 15 (or 15th of 3rd month after fiscal year end)
• K-1s due to members: Same as Form 1065
• Personal returns: April 15

Tax Elections

LLCs can elect to be taxed differently than the default. The main options:

S-Corporation Election

File Form 2553 to be taxed as an S-corp. Benefits:

• Potential savings on self-employment tax
• Pass-through taxation still applies
• Must pay yourself "reasonable compensation" (subject to payroll taxes)

See our S-Corp election guide for details.

C-Corporation Election

File Form 8832 to be taxed as a C-corp. This is rare for LLCs but may make sense if:

• You want to retain profits at the 21% corporate rate
• You're planning to seek venture capital
• You want to offer certain employee benefits

Remember: C-corps face double taxation (corporate tax + dividend tax).

Choosing Your Tax Structure

Frequently Asked Questions