Because most members of LLC company businesses are individuals, the year end is typically the end of each calendar year.

After the end of the calendar year, the LLC will complete its own internal books for accounting purposes and then prepare K-1 forms for each member.  The K-1 will tell each member what his/her proportion of the profits or losses are (this will be based on ownership and the specific tax allocation provisions for the LLC).

The LLC will actually file an information return with the IRS but it does not pay any taxes.  Each member will take the information on his/her K-1 and incorporate it into the personal return which is usually due in April of the following year (extensions are available).

So, in answer to when an LLC company pays taxes, the LLC itself does not pay taxes, it reports the company profits and allocates it to the members.

Having said all of this, an LLC company also has the option of being taxed as a C corporation if it deems a corporation tax structure more beneficial.  In these cases, the LLC will pay taxes as a separate entity and will follow the rules applicable to corporations.

One of the biggest benefits of running a business through a limited liability company is the automatic qualification of pass through taxation. Unlike an S corporation which requires that certain conditions be met and maintained in order to get pass through taxation, an LLC automatically provides this.

Why is this better than other tax options?

Well, it is not better in all cases. Some businesses are better off with corporate taxation and the ultimate decision depends on each case, but in most small business cases, pass through taxation wins out.

Here are some fundamental basic attributes:

1. Profits made by the business are passed through to the owners so the LLC itself does not pay taxes on profits. This avoids the double taxation of the corporate tax structure and often allows owners to keep more profits.

2. Losses are passed through. Generally, if a business generates losses in a year, those losses pass through to the owners and if the owners have other income, they can benefit from having the losses offset other income in the current year. There are some limitations so check with your accountant.

3. Contributions can generally be made by the members to the LLC at any time without tax consequences.

4. The LLC files an informational tax return but pays no income tax, instead items of gain, loss and other tax attributes are passed through to the members. With a single member LLC, there is no return at all and all tax reporting is done on the individual’s personal return.

5. Pass through taxation through an LLC also presents some opportunities for tax planning among members. This is an incredibly complex area and you should consult with your tax attorney or accountant, but one of the reasons the wealthy use LLCs so often is because of the tax flexibility offered.

Upon first glance, this question may sound strange to most people. How can a limited liability company entity also be a corporation?

But the answer to this is actually YES. You see, an “S corporation” designation is not a legal entity choice. Rather, it is a tax designation under the Internal Revenue Code. Before the existence of the LLC entity, the IRS created the S corporation as a way for a corporation that is a small business to avoid the double taxation of the corporate tax structure.

The S corporation rules require that the legal entity meet a laundry list of requirements that are designed to ensure that it truly is a small business as defined by the tax laws. These restrictions related to the number of owners, the type of owners, and a required simplicity of capital structure.

They named it the S corporation election because at the time, only the corporate legal entity qualified to elect S corporation status. However, in 1997, there were regulations passes that enabled the LLC (limited liability company) to also elect S corporation tax status if the LLC also met the laundry list of small business IRS requirements.

So, an LLC can be formed as a limited liability company under state law and gain all the state law benefits but also qualify to be taxed as an S corporation under federal tax laws. This is just one of the many advantages the LLC has over other entities. It offers the most tax choices.

Now, the LLC by default already qualifies for a single layer of taxation and there are no requirements to qualify for this. Accordingly, it does not have the same concern of double taxation as the corporation. Both the LLC default tax structure and the S corporation tax structure offer the same pass through taxation (single level) benefits.

However, there are some differences between the two tax structures that may or may not benefit your particular business. If this is an issue you want to explore, you should seek the advice of a tax attorney or a tax accountant who has ample experience in the differing tax structures.

Self-employment tax is owed on income generated by owners of a business.  Under the Internal Revenue Code, owners of sole proprietorships and limited liability companies under the default LLC tax rules pay self employment taxes resulting from the income generated by the business.

There is a maximum amount of income for this tax so when income reaches a certain point, then self-employment taxes will not longer be owed on the excess income. So, if your business intentions are to make more than $120,000 or so a year, it may not be worth planning for self-employment taxes and just focusing on making more revenue.  Overall, the single layer of income taxation is worth paying the self employment taxes for the initial stage of income.

The above rules apply to an LLC which is being taxed pursuant to its default tax structure which is a pass through structure.  However, after forming an LLC for a business, the limited liability company has the option of electing to be taxed as an S corporation or a C corporation.

Under an S corporation tax structure, business owners can be employed by the LLC and only the salary paid to the owner will be subject to employment taxes.  Excess profits distributions are not subject to self-employment taxes.  Now, the IRS does require that a reasonable salary be paid and they are quite strict about ensuring that this rule is not abused by business owners.  For example, if you are the sole owner of an LLC and provide consulting services which are paid by the hour, it will be hard to justify that your salary should be significantly less than the income generated by your services directly.

On the other hand, if your LLC business is selli g a product and you have assets of value and/or other contractors and employees, then your salary will not be based on the actual revenue generated.

Accordingly, it is important that you seek the advice of your accountant or tax attorney to ensure that based on your business activity and situation, this kind of structure may be acceptable for reducing overall self employment taxes generated by your LLC business.

Similarly, with a C corporation tax structures, employment taxes are only paid with respect to salaries paid out to owners of a business (this applies to any employees of the business).  However, an LLC business taxed under the C corporation tax structure is subject to double taxation when it comes to income taxation so there is a possibility that any employment taxes saved may be spent on income taxes.  Again, check with your accountant or lawyer to determine what tax structure is best for your particular situation.

From an LLC tax perspective, the default tax structure for a limited liability company is pass through taxation which means that whatever tax is owed gets passed through to the owners of the LLC.

At the end of the tax year, the tax items of the LLC are reviewed and it is determined whether the business made a profit or loss.  If it is a profit, then for tax purposes, the profit allocation is attributed to the members.  If there is only one member, that member will have to pay taxes on that profit amount through his or her persona return.  If there are multiple members, then the LLC Operating Agreement will dictate how the profit gets divided among the members and each will be responsible to report the profits amount allocated to them on their return.

It does not matter whether or not the LLC actually distributed those profits out to the members.  Determining taxation is a different process.  So, in the case where the limited liability company decides to keep all the profits in the business to reinvest in a later year, there could be a situation where members owe tax and did not receive any cash to cover the tax.  Some LLCs will plan for this by always requiring at least an amount to cover profits tax to be distributed to members.

Speak to your accountant about LLc taxation details for your business and working with him or her to arrive at the best reporting, allocation and distribution plan for your particular business situation.

Many non-LLC owners are shocked every year when they get personally sued for business problems and find that they need to sell their personal assets (like their home, car, other property) or lose their personal savings to cover any resulting liabilities.

Other benefits of forming an LLC include: tax benefits and choices, a more professional and trustworthy business image, lower risk of tax audit, a simple to operate business vehicle, a legal entity that makes it easy to take in investors or other members.

If you are interested, The LLC Expert offers an excellent formation and education service for forming an LLC: The LLC Expert Formation and Liability Protection Package.

The court specifically states that the personal liability existed because the LLC did not elect to be taxed as a corporation.

This is an important ruling for those single owner LLC businesses that plan on having employees.  It may be worthwhile for those single member limited liability companies who have or intend to have employees to consider electing S corporation tax status to protect against this personal liability.

Please note that the IRS can still find members liable if those members had the responsibility of filing those taxes and were negligent.

Taxes involve one area you want to be sure are properly being reported and paid. 

LIMITED LIABILITY COMPANY CAN BE TAXED AS A CORPORATION IF IT DESIRES

Bfore 1997, one of the biggest reasons for choosing a corporation over a limited liability company WAS taxation.  Some businesses were better off being taxed as a C corporation or an S corporation under the IRS rules.  Well now- a limited liability company can choose to be taxed as a C corporation or an S corporation (assuming it meets the S corporation rules) for tax purposes and still get all the advantages of an LLC (limited liability company) under state LLC laws. 

This is the best of both worlds and,in essence, takes away most of the reasons why any small business would ever choose a corporation entity over an LLC entity.  There are no requirements for an LLC to meet if it desires C corporation taxation as long as it makes certain filings in a timely fashion.  If an LLC wants to be taxed as an S corporation, it must meet the same requirements that a corporation must meet to be eligible for S corporation taxation under the IRS laws.

Still today, in practice, many new businesses receive advice from their tax advisers that they should form a corporation instead of a limited liability company and then elect for the corporation to be an S corporation.  Accountants especially will recommend the corporation with the S corporation tax status because this is what they have worked under for years before the LLC was able to achieve this same tax status.  They are just used to the older way- but the older way may not be the best for you given the new options. This advice is usually given because the accountant or adviser is not up to date on the limited liability company as the better and more flexible choice.

A limited liability company imposes much less formalities on owners and provides a more flexible business entity for the small business.  Plus, the limited liability can elect to be taxed as an S corporation- so you get the best of both worlds.

I would definitely defer to your specific accountant or adviser in this decision as he or she should know a lot more about your business in order to arrive at the best advice for you.  However, if he or she advises to form a corporation for a small simple business, I would just make sure that he knows that a  limited liability company (LLC) can be taxed as an S corporation and find out another reason why he is advocating the corporation. 

DEFAULT TAXATION FOR A LIMITED LIABILITY COMPANY

Single Member LLC. If a limited liability company is a single member LLC, the default tax classification is that the IRS will be a "disregarded entity" for tax purposes.  This means that the single member will report all LLC business income on his or her own personal tax return.  It is the simplest method of taxation.  Remember, the entity is only disregarded for TAX purposes not other purposes such as limited liability and governance. 

If the single member LLC wants to be taxed as a C corporation or an S corporation (it must meet the S corporation requirements,) the single member LLC can do so by filing a certain election form with the Internal Revenue Service.  This election form must contain certain required information and must be filed within 75 days from the formation of the single member LLC in order to be taxed as a C or S corporation from its formation date.

Multi-Member LLC.  If a limited liability company has more than one member, the default tax classification is that the IRS taxes the LLC as a "partnership" under the IRS laws.  This is a single layer of taxation and the tax profits or losses flow through to each member and are eventually reported on their personal returns in a Schedule.  The LLC itself also has to file an informational return with the IRS. 

A multi-member LLC can choose to be taxes as a C corporation or an S corporation (it must meet the S corporation requirements) if it makes sense for the business.  Similar to above, an election form must be properly and timely filed with the IRS.

COMMON CHOICE FOR THE SMALL BUSINESS LIMITED LIABILITY COMPANY

The default tax classifications are what they are for a reason.  The great majority of small business limited liability companies prefer the single layer of taxation afforded by the disregarded entity taxation for a single member LLC or the partnership taxation for the multi-member LLC.  However, there are certain instances where corporation taxation may be more beneficial for your limited liability company especially in the area of employee benefits if you have or are planning on having a decent size employment staff or desiring to offer premium benefits to your employees (which may include yourself). 

Speak to your tax adviser for the best tax classification for your limited liability company.