Many small business owners who are looking to open an LLC or currently have an LLC owners have several simple, yet important questions. Some of these questions pertain to legal structures and others regarding how the LLC is taxed. Our Article “11 Common LLC Questions” help answer these questions in detail below.
1. How do you tell if an LLC is a disregarded entity?
There are three different ways to tell if a LLC is a Disregarded Entity.
- When you file for your EIN, IRS asks you question whether you like to be a disregarded entity, and if you answer YES to this question then IRS will Issue the EIN letter stating its a disregarded entity. You should keep this letter
- Second way to tell if a LLC is a Disregarded Entity is to look at the Income Tax return that is filed. For example if someone owns a LLC by themselves and they have a small Cafe, they will file form Schedule C for disregarded Entity. So when you look at Schedule C, on top area, it will have LLC name, Address and EIN number. That will tell you if a LLC is a Disregarded Entity.
- If you don’t have copy of the IRS EIN letter, and you cannot locate your tax returns or you haven’t filed your return yet, you can call IRS at 800-829-4933(M-F Local time 7Am till 7Pm). This is IRS Business Phone Number and customer service agents are trained to help business customers. Once they verify your credentials, they will be able to verify if your LLC is a Disregarded Entity. In order to talk to IRS Customer Service agent, you will need the following information handy. Make sure you have everything before you call them.
- Legal Name of Corporation
- Corporation EIN(Employer Identification Number)
- Corp Address on records with the IRS
- Your Name, Title and Role in the Corporation
2. Is an LLC a Pass Through Entity
If the LLC elects to be taxed as a S Corp or a General Partnership then it can be a Passthrough Entity.
See more Details regarding how the Passthrough works for each entity
a. LLC Taxed as C Corp:
No LLC is not Passthrough in this case. LLC that elects to be taxed as C Corp need to file IRS Tax form 1120. C Corp files its own taxes and doesn’t pass though the income to its share holders. It only issues dividends which are not considered passthrough and the income is double taxed in the case of Dividends.
b. LLC Taxed as S Corp:
Yes. LLC is Passthrough Entity if taxed as S Corp. LLC that elects to be taxed as S Corp need to file IRS Tax form 1120S. S Corp doesn’t pay any taxes and Passthrough its income as K1 to its shareholders.
c. LLC Taxed as General Partnership:
Yes. LLC is Passthrough Entity if taxed as General Partnership. LLC that has more than one member can decide to be taxed as a General partnership and file form 1065. General Partnership only files the tax return but doesn’t pay any taxes and passthrough the income over to its shareholders by issuing form K1.
d. LLC Taxed as Disregarded Entity:
Not Considered Passthrough. If LLC elects to be taxed as a Disregarded entity i.e. LLC tax is filed along with Individual Tax Return form 1040. Taxpayer will file either Schedule C, Schedule E, Schedule F and so on depending upon type of business. This type of income is combined with personal tax and not technically a passthrough income.
3. Can an LLC own a C Corp?
Yes. LLC can own a C Corp. C Corp is the most flexible type of entity and C corporation owners or shareholders can be LLC, C Corporations, S Corporatoins, Individuals, Trusts, Foreign Nationals, Public corporations. There is no limit on how many shareholders or type of shares C corporation can have.
4. Can an LLC own another LLC?
Yes. One LLC can own another LLC. Limited liability Company has very flexible legal ownership requirements.
LLC can be owned by other LLC, Individuals, Foreign nationals, C Corp, S Corp, and Living Trust.
5. Can an LLC be an S Corp?
Yes. LLC can elect to be a S Corp by filing form 2553 within 75 days of formation.
There are some exceptions to late filing of S Corporation if you have a reasonable cause.
If you are not able to timely file your election and want to learn how you can get a S Corp Late Election, Click Here to read our article on this specific topic
If LLC elects to be treated as S Corp it will file form 1120S on or before March 15th each year and Issue its owners/Members K1s.
6. Can an LLC be a Partnership?
If LLC has more than one member than it can be a Partnership. Multi Member LLC by default a General partnership and should file form 1065 each year on or before March 15th or Sept 15th if extension is filed timely.
7. Can an LLC own an S Corp?
No. LLC cannot own a S Corp. Internal Revenue Code Subchapter S Election has very specific rules that S Corp must adhere to.
S Corp can only be owned by Individuals who are resident or citizens of United States or Living Trusts.
S Corp cannot be owned by a LLC, C Corp, or Non Resident individuals.
8. Can an LLC have employees?
Yes. LLC whether its taxed as a Disregarded Entity, General Partnership, S Corp or C Corp can hire and pay employees.
LLC employees are required to be issued W2 each year.
9. Can an LLC have 1099 employees?
Yes. LLC an have 1099 Contractor/Employees. LLC will issue W2 to Employees for work performed and will issue 1099 to independent contractors.
Rules regarding Independent Contractor VS employees are very complex and we recommend talking to a Labor Law Attorney or learning more by visiting IRS website page.
10. Can LLC Members be employees?
If LLC Elects to be Taxed a S Corp or a C Corp then LLC members can draw a W2 Salary just like other employees.
S Corp is required to pay reasonable compensation to its shareholders(members) who perform services for the Company. See Detailed Article about Reasonable Compensation Here.
C Corp should pay W2 Salary to minimize the profit to either lower or eliminate double taxation.
Hence LLC Member can definitely and in most case should be employees if they perform work for the company.
11. Are LLC double Taxed?
LLC Can be Doubled Taxed if they Elect to be Taxed as C Corporation by filing form 8832 with the IRS. In this scenario, LLC will file form 1120 and pay its own taxes. It will not Passthrough the profit to the owners or members.
Double Taxation happens when LLC(Taxed as C Corp) makes profit for example 100,000 and pay tax of 21% to IRS. Then it distributes the profit to its owners or members who then pay tax on this money as Dividends.
LLC can avoid double taxation by electing to be treated as S Corp, General partnership or Disregarded Entity.
Now that you have gone through 11 Common LLC Questions, hopefully you have found the answer you were looking for. If not click below to read more of our articles pertaining to Tax Topics to Learn More.