Depending on the number of members, an LLC can opt for one of four taxation regimes:
- Sole Proprietorship (i.e. disregarded tax entity),
- S corporation,
- C corporation.
This flexible tax structure is one of the most appealing aspects of the LLC as it allows owners to optimize their business entity to suit their particular needs and circumstances.
Default Tax Structures
If no choice is made, a single-member LLC will by default be taxed as a sole proprietorship. Multi-member LLCs (i.e. with more than one member) will be taxed as partnerships by default.
You don’t need to file anything with the IRS as a sole proprietor, but to be taxed as a disregarded tax entity (i.e. sole proprietorship), it must be a single-member LLC.
Multi-member LLC owners would report personal income on Schedule C of Form 1040, but the LLC would also file a Form 1065 with the IRS and issue K-1 statements to all LLC members.
S Corp or C Corp Taxation
LLC members can elect for corporate taxation as well, either as a C corporation or an S corporation.
By electing S corporation tax status, LLC owners may be able to avoid other taxes that a Sole Proprietor must pay, such as self-employment taxes (i.e. Social Security and Medicare). S corporations are still pass through entities, however, and aren’t subject to double taxation like C corporations. To be taxed as an S corporation, an LLC must file Form 2553 with the IRS.
An LLC could also opt for C corporation tax status by filing Form 8832 with the IRS. Doing so, however, subjects them to one of the biggest downsides of forming a C corporation, double taxation. A C corporation’s profits, however, are taxed at the corporate level and at the personal level.