- When filing a federal tax return, an LLC must file as a corporation, partnership or sole proprietorship.TAX TIME image by brelsbil from Fotolia.com
A limited liability company, or LLC, is a state statute--created business entity. The LLC structure is popular among businesses because it provides limited personal liability for the debts and actions of the LLC, just like a corporation. According to the Internal Revenue Service (IRS), "The federal government does not recognize an LLC as a classification for federal tax purposes. Therefore, an LLC business entity must file as a corporation, partnership or a sole proprietorship tax return."
Filing as a Corporation
- A corporation pays taxes as a business entity independent of its owners. According to the IRS, to be treated as a corporation, an LLC has to file Form 8832, Entity Classification Election, and then elect to be taxed as a corporation. If the LLC elects to be taxed as a corporation, then it must file Form 1120, U.S. Corporation Income Tax Return. A multi-member LLC that does not elect to be classified as a corporation will, by default, be regarded as a partnership.
Filing as a Partnership
- By filing as a partnership, all profits and losses are taxed as each partner's personal income. According to the IRS, if an LLC decides to file as a partnership, the LLC must file Form 1065, U.S. Return of Partnership Income. As with any partnership, "each owner should show his pro-rata share of partnership income (reduced by any tax the partnership paid on the income), credits and deductions on Schedule K-1 (1065), Partner's Share of Income, Deductions, Credits, etc."
Filing as a Sole Proprietorship
- An LLC may file as a sole proprietorship only if it is a single-member LLC, or SMLLC. According to the IRS, an SMLLC can be taxed as either a corporation or a single member "disregarded entity." By default, an SMLLC that does not elect to be taxed as a corporation will be classified as a disregarded entity, which is taxed as a sole proprietor for income tax purposes. As a sole proprietor, you must then file Form 1040.