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How does an LLC handle income taxes?

On Behalf of | Feb 23, 2022 | Business Formation, Estate Planning |

As you know, there are many ways to form a business in South Carolina. With that in mind, many people choose to form a limited liability company (LLC). One reason that LLCs are so popular is that they protect business owners from many personal liabilities. But how do LLCs work when it comes to taxes?

Handling income taxes as a single-member LLC

Filing taxes as the owner of a single-member LLC is similar to what you would do under a sole proprietorship. You will need to report your LLC’s expenses and income on Form 1040, Schedule C.

If your company was profitable for the year you’re filing, you would owe taxes under your personal income tax rate. Should your business generate a net loss for the year, you would subtract these losses from your personal income.

Multi-member LLC income taxes

Sometimes, one person doesn’t want to handle the task of business operations by themselves. If that’s the case, you might form a multi-member LLC. When it comes to income taxes, the IRS treats a multi-member LLC as a pass-through entity. This means that each member in a multi-member LLC would pay taxes based on their stake in the company.

It’s also important to note that a multi-member LLC will need to file certain tax forms. One of these forms is Form 1065, which gives the IRS more information about a business. All members of a multi-member LLC must also complete and file a Schedule K-1 form.

No matter what kind of company you own, it’s imperative to file your business taxes each year. Both single-member and multi-member LLCs have to pay income taxes. However, the forms each business needs to complete and file will differ from one another.