How An LLC Is Taxed

How an LLC is taxed

Many clients are referred to our office with questions about Limited Liability Company’s taxation. What is an LLC? The Massachusetts LLC law became effective January 1, 1996 with the creation of the Limited Liability Act. An LLC is a form of business organization that is an unincorporated organization having one or more members formed pursuant to Massachusetts General Law chapter 156C. The various tax treatments available to LLC is Schedule C, Corporation, S Corporation, and Partnership. These options can be daunting.

Now that we have all of the legal jargon out of the way, let’s talk tax!

How is an LLC taxed and how will that affect you? I will start with explaining the automatic tax treatment by the IRS and then Tax Elections that are available. An LLC can have one or several members, based upon the number of member(s) the IRS automatically taxes the LLC as a Sole Proprietor if one member; and a Partnership if two members. Therefore, you must be extremely careful when applying for a tax identification number as that is the Form that you inform the IRS as to the number of members in the LLC and in turn the IRS issues a notice with the LLC tax identification number and specific tax return that needs to be filed. In both situations the profit of the Organization is taxed with your individual tax return subject to federal income tax and self-employment tax (subject to IRC limitations), along with Massachusetts income tax.

There are Tax Elections available for a LLC member or members to make with the IRS to have the Organization taxed as a Corporation or S Corporation. You might be thinking at this point how I make it through the maze of IRS Forms to complete this task. To be treated as a Corporation you must file an Entity Classification Election Form with the IRS. To be treated as an S Corporation you must file an Entity Classification Election Form along with Election by a Small Business Corporation (pursuant to Code section 1362). I recommend mailing the executed Forms to the IRS certified and return receipt to prove timely mailing and IRS receipt of the Form. You are correct, it is a long and precise process that you must go through, so please move through it with extreme care.

This process appears confusing on its face. However, if think of the process in terms of how you want to be taxed and what Form you desire the LLC to file, that will provide you with the road map of Forms you must file with the IRS to accomplish your goal. Remember, choosing the correct tax treatment of your LLC will cost you thousands of dollars or save you thousands of dollars.


Thomas D. Terranova, Jr., CPA, PFS, CITP

Terranova & Associates, LLC.


Posted by JitLeeBillings

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