Most limited liability companies are taxed as a pass through. So, I assume this question is based on an LLC that is not taxed as a corporation.
With pass through taxation, the LLC itself as an entity never pays taxes. However, from an accounting perspective, all the accounting items that are relevant to the business are taken into account.
So, practically, you would take all your revenue, expenses, gains and losses for your business is and determine what the taxable income, if any, or the taxable loss of the business is at the end of the year. You would apply all the tax rules, limitations, restrictions and benefits to these numbers.
The details of all the accounting items that are relevant to determining taxation are then set forth in a document which varies depending on whether your limited liability company is a single member LLC or a multi-member LLC.
For the single member LLC, the tax reporting and detail will be included in a Schedule to the single owner’s personal tax return. The end number, if it results in taxable income, will be added to the single owner’s other income on his/her return for purposes of determining the overall tax liability. If the business is actively run and there is a loss, then the single owner can take the losses to reduce his income tax liability on other income.
For the multi-owner LLC, the LLC includes the detail no an informational tax return – the Form 1065. It then takes the bottom line income or loss and allocates it among the multi-owner members based on the provisions of the LLC Operating Agreement. Each member gets a form which shows his or her allocation of the LLC’s income or loss.
So, even though the LLC itself does not send a check to the IRS, the procedures and analysis for determining the taxable income or loss of the LLC business is done as a business entity. But then the income or loss is passed through to the owners of the business to report on their individual returns. The result of this is that the income of the business is only subject to one level of tax. And, in most cases, if there is a loss, a business owner can get a benefit by being able to take that loss to reduce tax liability on other income.