The Limited Liability Company (LLC) is a terrific tax entity because of its flexibility, specifically being able to choose how it is taxed. 

An LLC can be taxed in many different ways

An LLC is not a tax entity, it is a legal entity. As such, an LLC can choose how it wants to be taxed.

An LLC can be taxed as:

– A sole proprietorship
– A partnership
– A C corporation
– An S corporation

Do you know how your LLC is taxed?

If your LLC did not make an election, then it is taxed as the “default classification.”

The default classifications are:

If your LLC has one member (owner), then it is disregarded for tax purposes. This means that all the LLC activity is reported by the owner and the LLC files no separate federal tax return. However, some states require disregarded LLCs to file a state tax return.

If your LLC has more than one member, then it is taxed as a partnership and files a partnership tax return.

Special rule:
If you and your spouse are the only owners and are in a community property state, then you can choose which of the two classifications you want to use.

If your LLC made an election, then your LLC is taxed as a C Corporation or an S Corporation. This election is typically recommended for operating businesses that are profitable.  This election is typically not recommended for LLCs that hold investments, such as stock or real estate. LLCs that hold investments are typically best left in their default classification. 

Understanding the fundamentals of entities, particularly LLCs, is a key part of building a successful tax strategy.

If you want to learn more about how to take advantage of these tax strategies, sign up for our updates or email us for an appointment to get started today