Limited Liability Company (LLC) – Which Return to File

A Limited Liability Company (LLC) will file one of the following depending on its situation.

• Form 1040 (Schedule C, E, or F) (appropriate for single member LLCs)
• Form 1065 (Partnership) (appropriate for multiple member LLCs)
• Form 1120S (S Corporation)
• Form 1120 (Corporation)

IRS Publication 3402 Tax Issues for Limited Liability Companies provides additional information to determine the best tax reporting form to use for your LLC.

So What Kind of Tax Return Do I File for an LLC?

• Single member LLCs

1. If the only member of the LLC is an individual, the LLC income and expenses are reported on Form 1040, Schedule C, E, or F.

1. All net income is subject to “Self-Employment Tax”, around 15.3%. Plus, all net income is subject to income tax.
2. The Member is not allowed to be on Payroll and should not receive a W-2 at year-end for this entity.

2. If the only member of the LLC is a corporation, the LLC income and expenses are reported on the corporation’s return, usually Form 1120 or Form 1120S.

1. The shareholder-member can be on Payroll and receive a W-2 at year-end for this entity.
2. Remaining net income subject “only to” income taxation via pass-through, using a K-1, to Individual tax return at taxpayers effective percentage rate.

PLEASE NOTE: Single-member LLCs may NOT file a partnership return.

• Multiple Member LLCs

1. Most LLCs with more than one member file a partnership tax return, Form 1065.

1. Member-Partners are disallowed from being on payroll and not allowed to receive a W-2 at year-end for this entity.
2. Each member-partner’s net income passes-through, via a K-1, to the individual tax return and is subject to income tax.
3. For all member-partners, who are active in the partnership, their share of net income from the entity is subject to “self-employment tax” at about 15.3%.
4. You don’t need to file a Form 8832 if you want to file as a partnership tax return.

2. If you would rather file as a corporation, Form 8832 must be submitted.

1. You can elect to file as a S-corporation or as a C-Corporation
2. Shareholder members are allowed to be on payroll.
3. Active shareholders should be on payroll.
4. Remaining net income flows to the individual tax return and is only taxed as income and no self-employment tax will be assessed.
5. Filing as a C-Corporation the business will be taxed directly at the corporate tax rates and also taxed on individual distributions in the form of dividends (double taxation).
6. Filing as a S-Corporation all net income flows to the individual return via the shareholder member’s K-1. None of the net profits are subject to “self-employment tax”.
7. To elect to be an S-Corporation over a C-Corporation file Form 2553.

Notes:

• Whichever return the LLC elects to file, the LLC should continue to file that same tax return in future years. You may switch, but it can be difficult and has time limitations.
• In summary, you can see the tax saving advantage of a LLC S-Corporation as it relates to payroll. Please note, that the State of New Jersey has an annual gross receipts on corporations, normally from $375 up to $1,500 depending on the amount of the entity’s NJ gross receipts.
• Also, there is a partnership fee for New Jersey partnerships with partnerships with “more than” two partners.
• Owners of a LLC are called Members. The tax returns can use the words members, shareholders and partners interchangeably depending on the tax return form. In general, members of an LLC who file a partnership tax return are called partners. LLC Members of an S-Corporation and C-Corporation are considered Shareholders on a corporate tax return.