A limited liability company (LLC) doesn't pay taxes at the business level. Instead, LLC pay passes through to the member's personal annual tax return.

This allows LLCs to avoid the double taxation of a corporation while still having the advantage of limited liability security.

Get familiar with the basics in our How is a LLC Taxed guide beneath.

LLC Tax Basics

Naturally, LLCs are treated as a pass-through element for federal personal tax purposes. This means LLCs don't pay federal annual taxes at the business level. LLC pay passes through to members' personal annual tax returns based on their level of ownership as it's laid out in the LLC operating agreement. The pay is then subject to individual personal tax rates.

Payments made to members are called distributions or draws. Distributions are subject to self-work taxes. For some LLCs, it could appear to be legit to choose S corporation tax status to reduce self-business taxes.

Single-Member LLC Taxes

Single-member LLCs are taxed by the IRS as "Disregarded Entities." This just means the IRS ignores the structure of your business (i.e., the way that it's a single-member LLC) and taxes you as it does a sole proprietorship. The LLC's pay is reported on your personal tax return toward the year's end.

With your LLC pay, you can pay yourself with a distribution. You should pay self-work taxes on your distribution but, because you previously paid personal tax on the LLC's all out profits, you don't need to pay annual tax on the distribution. This process is made sense of additional in our How Would I Pay Myself From My LLC guide.

An outline showing which forms a single member LLC needs

Multi-Member LLC Taxes

A multi-member LLC is normally taxed as a partnership by the IRS. This means that LLCs don't pay federal annual taxes to the IRS and all profits are passed through to the members of the LLC according to the partnership operating agreement. The members of the LLC then pay the taxes to the IRS on their individual tax returns.

Like single-member LLCs, every proprietor in a multi-member LLC can take a distribution from their share of the LLC's profits. This process is made sense of additional in our How Would I Pay Myself From My LLC guide.

A graph showing which forms members of a multi member LLC must finish up

Other LLC Tax Structures: S Corp and C Corp

For most individuals starting a LLC, the default tax structures — "disregarded element" for single-member LLCs or "partnership" for multi-member LLCs — are presumably the most suitable. These are the standard tax structures for limited liability companies and don't require a special political race while forming.

In any case, under specific circumstances, both single-member LLCs and multi-member LLCs can also choose to be taxed like a corporation. The two corporate tax classifications are C corporation (C corp) and S Corporation (S corp).

A C corporation pays taxes on gross pay minus every single operating expense. They then, at that point, distribute profits to shareholders , and shareholders deliver personal tax on the dividends and to a registered agent. This is also known as "double-taxation."

A S corporation allows the member(s) of a company to save on taxes. A tax classification with specific rules can be helpful to your company in the event that your business earnings are significant. Nonetheless, prior to going with a choice, it's critical to understand the basics of a S corp and what changes might be in store for your business in the event that you decide to choose S corp status.

Selecting these tax structures should be possible when you apply for an EIN Number for your LLC or sometime in the future.