One of the benefits to using a limited liability company
is the flexibility of being able to choose how the entity is taxed. After
a new LLC is formed, its owners must decide the method by which they would like
their business taxed. By default, an LLC is treated as a pass-through
entity, which means that it does not pay federal taxes directly, but its income
or loss is allocated to the owners, who then pay taxes on that income. If
the LLC has only one member, it files no tax return and all transactions of the
LLC are treated as transactions of the owner for tax purposes. If the LLC
has more than one member, the LLC files a partnership tax return, which reports
the LLC's income and how that income is to be allocated to each owner. Partnership
style taxation is governed by Subchapter K of the Internal Revenue Code.
However, the owner(s) of an LLC, whether the LLC has a single member or
multiple members, may choose to have their LLC taxed as a corporation. In
this case, the LLC can be taxed as a so-called "C Corporation," which is
governed under subchapter C of the Internal Revenue Code, or an "S
Corporation," which is governed by Subchapter S. This ability of LLC
owners to elect the company's means of taxation is called the "check the box"
regulations. Below are the summaries of the four methods of taxation of an LLC:
As you can see, there are many factors to consider in
choosing how to have an LLC taxed. Your final choice should be based on
your own specific situation. Therefore, before making any decisions on
your form of business, you should speak with your attorney or accountant.
Read more articles by Alexander Davie at Strictly Business, a
business law blog for entrepreneurs, emerging companies, and the investment
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