HOW IS AN LLC TAXED? #1
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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 insurance.
Become familiar with the basics in our How is a LLC Taxed guide underneath.
LLC Tax Basics
As a matter of course, LLCs are treated as a pass-through substance 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 annual tax rates.
Payments made to a registered agent are called distributions or draws. Distributions are subject to self-business taxes. For some LLCs, it could check out to choose S corporation tax status to reduce self-work 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 absolute 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.
Multi-Member LLC Taxes
A multi-member LLC is commonly 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 with an EIN number 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.