For this tax status, both the LLCs and the individuals have tax reporting requirements. LLCs of all sizes -even single-member LLCs- can choose to be a corporation as their tax classification. Also, the LLC must prepare tax forms and issue them to its owners as part of its partnership agreement. Like disregarded entities, LLCs with the partnership classification are pass-through entities, meaning individual owners are responsible for paying tax on the LLC's profits.Ī downside is that LLC owners are taxed on profits even if they remain in the company bank account. LLCs with multiple owners/members can be taxed as partnerships. The advantage of this classification is that the LLC income is only taxed once.Ī disadvantage of this tax status is that the owner is taxed on all LLC income, even earnings that remain in the business account at the end of the year and are targeted for future expenses.
Under this classification, the LLC's income passes through to the sole owner, who pays income tax on their personal tax return. The simplest and most common tax classification for single-member LLCs is the disregarded entity. Within the corporation classification, C corporation (C corp) and S corporation (S corp) are two sub-categories. The three main options for LLC tax classification are disregarded entity, partnership, and corporation. The type of tax classification does not change the type of entity, only how the IRS will tax the entity. The decision you make depends on the size of your business and your goals. When you form a limited liability company (LLC), you have a few options for how your business will be taxed.
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