The “limited liability company” or “LLC” has become a popular form of business structure. The LLC provides limited liability to owners similar to other business forms like corporations and limited liability partnerships. However, LLCs have fewer requirements, don't require formal incorporation and can be set up by a single owner. The LLC structure was created in statute by the states. Thus, the IRS does not formally recognize the LLC structure, which can make filing taxes for these businesses confusing.
Verify that the business has been formally set up as a limited liability company with the appropriate state government agency. Requirements and procedures vary from state to state but typically require filing documents with the Secretary of State's office.
Review the business entity’s classification election. Since LLCs are not formally recognized by the IRS as a taxable structure, each LLC must choose one of the recognized business structures for purposes of tax treatment. An LLC may choose to be taxed as a corporation, a partnership or a sole-proprietorship, depending on how the ownership of the business is structured.
File IRS Form 8832, if necessary. If this is the first year the LLC will file taxes, then it is required to file Form 8832, Entity Classification Election, to choose a tax classification for the business. If the LLC has filed taxes previously, then it must file in subsequent years as the same type of business structure, unless the entity type is formally changed by filing another Form 8832.
Determine the appropriate tax return to file. An LLC classified as a sole-proprietorship should file Form 1040 Schedule C (Profit or Loss from Business), unless the business is farming-related, in which case Schedule F may be required. LLCs classified as partnerships must file Form 1065 (U.S. Return of Partnership Income). LLCs classified as corporations file Form 1120 (U.S. Corporation Income Tax Return), unless the business is structured as an S corporation. LLCs set up as S corporations must file Form 1120S rather than Form 1120.
Gather the necessary information to complete the required tax forms. This will include the business name, address and tax ID number – either an employer identification number [EIN] or a Social Security number for sole-proprietorships. Business income and expense records will be necessary as well.
Select a reputable accounting firm or certified public accountant (CPA), if you don’t feel qualified to prepare your own taxes. Owners of small businesses with less complicated finances may be able to file without the assistance of a tax professional. In this case, tax preparation software may prove useful.
Expenses incurred filing tax federal, state and local tax returns may be tax-deductible.
- IRS: Form 8832 (Entity Classification Election)
- IRS: Forms for Limited Liability Companies (LLC)
- U.S. Congress. "H.R. 3448 -- Small Business Job Protection Act of 1996, Sec. 1308." Accessed April 20, 2020.
- Internal Revenue Service. "Limited Liability Company (LLC)." Accessed April 20, 2020.
- NOLO. "Are LLCs Required to Hold Meetings?" Accessed April 20, 2020.
- Chronicle of Small Business. "LLC Bylaws." Accessed April 20, 2020.
- Internal Revenue Service. "S Corporations." Accessed April 20, 2020.
- Digital Media Law Project. "S Corporation." Accessed April 20, 2020.
- Digital Media Law Project. "Corporations." Accessed April 20, 2020.
- Expenses incurred filing tax federal, state and local tax returns may be tax-deductible.