How do LLC taxes work?

LLCs are taxed differently depending on how they elect to be taxed. LLCs may elect to be taxed as a sole proprietorship, partnership, S corporation, or C corporation.

If an LLC elects to be taxed as a sole proprietorship or partnership, the profits and losses of the business are passed through to the individual members and taxed at the individual level. This is known as “pass-through” taxation.

If an LLC elects to be taxed as an S corporation, the profits and losses of the business are also passed through to the individual members and taxed at the individual level. However, the LLC must meet certain requirements to qualify for S corporation status, including having no more than 100 shareholders and only one class of stock.

If an LLC elects to be taxed as a C corporation, the profits of the business are taxed at the corporate level and any dividends paid to shareholders are taxed again at the individual level. This is known as “double taxation.”

It’s important for LLCs to carefully consider the pros and cons of electing different types of taxation before making a decision. Factors to consider include the potential tax consequences for the LLC and its members, as well as the potential administrative and compliance costs of operating as a sole proprietorship, partnership, S corporation, or C corporation.

It’s worth noting that the rules for LLC taxation may vary depending on the jurisdiction. LLCs should consult with their tax advisors and local tax authorities for more information about the rules for LLC taxation in their specific jurisdiction. Prominent Financial Consultants offers a range of services to help our clients succeed, and we would love the opportunity to discuss how we can help you. If you would like to schedule an appointment with us, please schedule a free 15 Minute Financial Clarity Call so that we can learn more about your needs and goals or schedule your tax appointment here.