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BUSINESS ORGANIZATIONS: PART 3 - LIMITED LIABILITY COMPANIES-TAXATION BASICS

Posted by attorney Jeffrey Weaver

LLCs that have several owners are “Multi-Member" LLCs and are generally taxed by the IRS like partnerships, meaning that the LLC files an information tax return but does not actually pay taxes itself. Rather, the LLC passes its profits and losses through to its members, who report their portion of the LLC’s business income or loss on Schedule C of their individual income tax returns. An LLC that has one owner is called a “Single Member" limited liability company and is treated (by default) as a disregarded entity for Federal income tax purposes, just like a sole proprietorship. Thus, the profits and losses of the Single Member LLC aren’t taxed at the entity level and simply pass through to the single member, who then pays taxes on the income on his or her tax return. This means that both Single Member and Multi-Member LLCs offer the benefits of pass-through taxation of profits and losses and limited liability and personal protection for the owners. It is easy to see why the LLC of business organization has become the entity of choice for many new business owners.

However, both Single Member and Multi-Member LLCs can elect to be taxed as a Corporation. Importantly, certain qualifying Single Member and Multi-Member LLCs can elect to be taxed as an S-Corporation, which may provide an opportunity for the members to enjoy significant tax savings. Tax treatment and related implications are extremely important to consider when determining whether an LLC is the appropriate entity for your business. There are many factors to consider when determining whether the default IRS treatment is best for your company, or whether you should affirmatively elect to be taxed as an S-Corporation.

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