If you own an LLC, you can decide how the IRS treats your business, either choosing to use partnership, corporate or sole proprietor tax rules. In fact, there is more flexibility for an LLC when it comes to choosing how the IRS taxes your business earnings since there are no special statutes guiding how an LLC files its taxes.
Having said that, it is worth mentioning that the IRS automatically treats your business as a partnership once you create an LLC. As such, it is up to you to determine how the IRS treats your business afterwards by electing for corporate tax treatment and filling IRS Form 8832. Keep in mind though that once this election is made, it cannot be reversed for five years.
Filing Income Taxes as a Partnership
Unless an LLC elects for tax treatment as corporation, the IRS automatically treats the LLC as a partnership. The LLC must file Form 1065 (U.S partnership Return of Income), which includes a Schedule K-1.
The responsibility of the limited liability companies that is subject to the partnership tax rules is to prepare annual partnership tax returns on IRS Form 1065. It is not responsible for actually paying tax on business earnings. All income, deductions and credits are reported by each individual owner. Each member is required to report this information on a 1040 tax return and attach a schedule E. The IRS requires all LLC members to pay taxes on their distributive share of the profits.
Filing Income Taxes as a Corporation
One major disadvantage of this option is that business earnings are taxed twice. The first occurs when the LLC files a corporate tax return, and the second is imposed when they receive dividend. Each owner is expected to report the dividend taxable income on their personal Form 1040 and pay tax on it. However, this option may be of benefit to the LLC since the owners may decide to keep a significant amount of the profits in the business to contribute to its growth.
Filing the Income Taxes as a Sole Proprietor
Here, the owner and the LLC are regarded as a single entity by the IRS. This means that you are personally responsible for all tax payments and filings. As such, you are expected to complete a Schedule C attachment alongside your income tax return. The Schedule C only reports the income and deductions that relate to your business activities. If you calculate a profit on Schedule C, then the amount is included with the other income you report on Form 1040.