What Tax Form Do I File When I Have an LLC?
If your business is registered as an LLC, you have a lot of options when it comes to filling out your tax forms. According to the IRS guidelines, you are allowed to file as a sole proprietor, partnership, or corporation. Understanding the difference between these rules, however, can be difficult. Which form you file will depend on how you want to classify your business, but you must first understand the differences in these business types.
LLCs are extremely useful for legal protection purposes, but the IRS doesn't really see them as being particularly relevant when it comes time to file taxes. In other words, the IRS will make you choose from one of the following three options when it's time to pay your taxes. There is not a way to file as an LLC.
If you are the only person who owns your business, then the IRS considers you to be a sole proprietor or self-employed. In fact, this is likely the only way for you to file if you are the sole owner of a business. If anyone else owns even a small portion of your company, then you must file as a partnership or corporation.
As a sole proprietor, you will need to file a from 1040 along with the appropriate attachments. Essentially, this form will require you to report all of your business income and expenses. The difference between these two amounts is the total profit of the business, which you will have distributed to yourself as the business owner. Money that has been distributed to you as personal income will be subject to taxation.
Filing as a sole proprietor is the easiest method of filing taxes for most small business owners, but it is important to get professional help if you have trouble identifying your income and expenses. Without careful tracking of expenses, it's possible for a business owner to pay a to more in taxes than they otherwise would have. Skilled professionals can also help you to identify expenses and ways to carry over profits from year to year to reduce your overall tax burden.
If you're in a partnership with another person or business, you have to file as a partnership or corporation. This is true even if your partner is mostly silent (that is, they leave the daily operation of the business to you). Essentially, this forces your business to declare not only your income and expenses to the IRS, but also how the profits from the business were divided.
This is done through filling out a Form 1065. This form essentially tells the IRS all of the above information, but it does not produce a tax bill or return at the end. Instead, each owner of the business must then use the information provided on these forms to produce their own individual tax returns. Specifically, the business will report the individual income for each owner on a Schedule K-1 at the end of the year. Each partner is then responsible for their own taxes; partners cannot "get in trouble" if one of them does not pay their taxes; the IRS uses this series of forms to ensure that each partner has to deal with their own tax burden.
The easiest way to think about how a corporation is taxed is to think of it as its own individual entity. Rather than profits being split among various owners, a corporation pays taxes on its own profits. This is done each year by filling out a Form 1120. This form requires the corporation to report all income and expenses, then generates a tax bill based on the net profit of the business.
There are two different types of corporations. C-Corps are treated as completely separate entities. S-Corps are set-up as separate entities, but all of the net profits are "passed through" to the owners of the business.
This means that a C-Corp will pay corporate income taxes, but it will compensate its owners through a paid salary and stock options. Owners in a C-Corp pay individual income taxes on the earnings from their shares and their salary.
An S-Corp, on the other hand, will calculate its total net profit with a Form 1120S, then "pass on" that income to its owners. Each individual owner will have the amount of their income reported on a Form K-1. Each owner then has to file their taxes individually. By using an S-Corp set-up, the business does not have to pay corporate income tax.
If you're confused, don't worry. Setting up a corporation can be tricky, and it's usually a good idea to get professional help. While an LLC may want to set itself up as an S-Corp to avoid what many people see as double taxation, it's not always the best move. C-Corps are able to claim any dividend payments as tax deductions.
Essentially, this means that in general, C-Corps are paying more in federal tax, but their owners are paying less. S-Corps are paying nothing in federal tax, but their owners are paying a lot. Of course, this general guideline doesn't apply to every business, and what works for a business in one tax year isn't necessarily the best thing for that same business in the next tax year.
For these reasons, many business owners seek help when it comes to filing their taxes. Even if a business owner has years of experience in filling out the paperwork, having a professional review expenditures and profits in order to develop a strategy to minimize both their business and personal tax bills often pays for itself.