THEY HAVE NOTHING TO DO WITH EACH OTHER! That's everything you need to know about LLC's and taxes. I can't tell you how many times CPA's ask new clients "So what business tax return do you file?", and then the client says "Were an LLC." That's like the guy at Home Depot asking "What kind of hammer do you need?" to which you answer "I live in an apartment." So here I'm going to quickly break down the truth about LLC's.
An LLC is created at the STATE level. It has nothing to do with IRS upon creation. However, all corporations and associations are required to file a tax return so IRS has setup some rules that determine how LLC's can be treated for tax purposes.
First, you need to understand there are two different kinds of LLC's: those with one member/owner and those with more than one member/owner.
SINGLE MEMBER LLC RULES
A single member LLC is disregarded by IRS UNLESS the owner elects otherwise. What this means is that an LLC with one owner that DOES NOTHING will take on the tax treatment of its owner. If the owner is an individual the LLC will be treated as a sole proprietorship. If the owner is a corporation it will be treated as a division of the corporation. Simple.
MULTI MEMBER LLC RULES
Multi member LLC's are taxed as partnerships UNLESS the owners elect otherwise.
LLC's that ELECT
If the owner(s) elect NOT to be treated as disregarded the LLC can be taxed as a corporation. From here the owner(s) can elect to be treated as an S corporation.
So here are the three questions you need to answer if you have an LLC
- Are you the only owner?
- Did you make any elections NOT to be a disregarded entity?
- If you elected to be taxed as a corporation did you ALSO elect to be treated as an S corporation
If you have any questions please call, but don't expect your CPA to know all the answers just because you say "I'm an LLC." The hammers are on isle 10.
Article originally appeared on Axiom CPA, P.A. (http://www.axiomcpa.com/).
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