How are LLC Taxed?

When it comes to company formation, the LLC is a suitable choice. But you may have an important question: How are LLCs taxed? The taxes an LLC pays may vary, but there are some important facts to know about LLC taxation.

LLC Taxes

Most of the businesses that incorporate with RTRSupports Limited choose to form their company in Delaware. Delaware is popular for its flexibility and simplicity of LLCs. An LLC has a federal tax status of a partnership for a multi-member LLC or the tax status of a sole proprietorship for a single-member LLC.

All its profits and losses pass through the business and its owners (members) or sole members. Then they pay taxes on the profits or deduct the losses on their individual 1040 personal income tax returns. Thus, the business entity is not required to pay taxes directly. Instead, a multi-member LLC can only file an informational partnership tax return referred to as an IRS Form 1065. Then its owners receive a K-1 for their share of the profits or losses. According to the agreement, this amount can be distributed disproportionately to ownership percentage.

A sole member LLC does not require any additional return other than the IRS Form 1040 of the owner. It reports income and expenses on the Schedule-C of the IRS Form 1040 tax return for the sole member LLC.

It results in the conversion of all profits to self-employment income. All profits are subject to self-employment taxes as "earned income." This tax can be burdensome, leading to a higher efficient tax rate.

LLC Tax Rate

LLC income would be taxed at the owner's standard tax rate. The same happens to LLCs who choose to be paid as S-corps, which taxes personal income only when it is recorded on Form 1120S.

If an LLC elects to be taxed as a C-corp, they are referred to corporate tax rates and double taxation. C-corps pay a flat 21% corporate tax rate under the Tax Cuts and Jobs Act. In addition to the 21% corporate tax rate, corporate dividends will be subjected to tax on the personal tax return of the owner.

There is also a tax in Delaware which is known as a franchise tax. This tax is also referred to as a state fee as it is always a flat $300 owed annually to Delaware and does not change on the basis of income.

C-Corp Taxes

C-corps have a negative reputation because most people claim that they always lead to higher taxes. A C-corporation election can lower your taxes if it is done properly on a modest consulting business or small operating company. The corporation's tax rate can be low and the dividend then paid to stockholders is taxed again as a dividend.

C-corps have the added advantage of being able to pick a fiscal year to permit for shifting of income. C-corps also enable profits and losses to be carried forward for a business with oscillating profits and losses or even a series of losing years before it becomes profitable. Such as, a business with heavy equipment purchases should consider a C-corp from the beginning.

A business that should never make an S-corp election or be a C-corp is a real estate investment business. Landowners must always hold real estate through an LLC taxed as a partnership or sole proprietorship. That enables profits from sales in the future to be taxed as long term capital profit instead of ordinary income, which is a lower effective tax rate.

Thus, you must consult with a tax advisor within 75 days after the formation of an LLC or corporation to decide if you want the default tax status or make a corporate tax election. You are not required to form a company to make a corporate tax election. Under the IRS check the box rules LLCs are also eligible for 's and C tax treatment, but more importantly, they default to partnership/sole proprietorship status and have many non-tax advantages superior to corporations.


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