Filing the correct amount of tax can be a difficult task for even just one person, because they need to make sure they account for all the proper types of income that they’ve had during that tax year, as well as the correct amounts of them.
If you don’t get it right, then you can often face penalties. However, when it comes to entire companies, you might wonder how – or even if – they file tax returns. For example, do LLCs file tax returns?
We’ve got the answers for you. In our guide below, you’ll find out all about whether an LLC needs to file tax returns, as well as just what exactly an LLC is and how they might go about filing them.
Contents
Do LLCs File Tax Returns?
To answer the main question, the answer is yes: LLCs do have to file tax returns. This isn’t just the case for active companies with an income, either.
Even if an LLC has had neither income nor expenses, therefore making it inactive, then it still has to file tax returns at the end of the tax year.
What Is An LLC?
Now that we know they have to file tax returns even when they are inactive and have had no income, it’s a good idea to define what an LLC actually is for those who don’t know.
LLC stands for “limited liability company”, which is a form of private limited company that is specific to the US.
The structure of these businesses combined the limited liability that comes from a corporation with the pass-through examination that comes from partnerships (or sole proprietorship).
What Is It Like For An LLC To File A Tax Return?
Filing tax returns as a Limited Liability Company is quite different to how you may be used to filing your taxes, as an individual person with your own straight income.
When an LLC files as itself (an LLC) then it gives them greater room to move around when deciding how their business earnings are going to be taxed by the IRS (the Internal Revenue Service, the organization that collects taxes).
With greater flexibility in choosing how they will be taxed, the LLC can have better choice over which tax rules they’re going to be conditioned to.
But what sets of rules can they use? When it comes to an LLC, they don’t have to follow a set group of rules just for limited liability companies.
Instead, the IRS dictates that they can use the tax rules that are used for one of the three: sole proprietorship, corporation or partnership.
A different outcome that comes from an LLC choosing to file their taxes as a corporation, under those rules, is that it is considered a separate entity – which LLCs are not.
In the eyes of the IRS, LLCs on their own (as well as partnership and sole proprietorship) is considered a pass-through entity. For these entities, the profits go onto the LLC owners/members, who then file those profits alongside their own personal tax returns.
It is also important to keep in mind that some states in the US will charge LLCs with a tax. Though LLCs do not have to pay federal income taxes, some will be subject to these state rules depending on where they are operating from.
Tax Elections For LLCs
A tax election is what allows a company to choose the way that its affairs are treated for Corporation tax purposes.
If an LLC only has one owner then the IRS will automatically not count it as being subject to federal income tax, with the single owner instead reporting both the expenses and income of their LLC within their own personal tax returns that they’re filing for that year.
However, if an LLC has more than one owner, then circumstances change. In these cases, the IRS will recognize the LLC as a partnership.
The LLC will then file an informational partnership tax return, while the owners file the expenses and income on their own personal tax returns.
When the LLC is created, the classification can be chosen then or in the future. If an owner wants to change these classifications, then the taxes can be filed as a corporation.
If the LLC wants to change its classification after it has been formed, then they will need to file a Form 8832 with the IRS.
Filing for corporate taxation can actually benefit an LLC in cases where the LLC is keeping a significant portion of its profits within the business itself.
This is because taxes for the LLC are based on the rate that corporations are taxed on, and owners will not be taxed on their personal income tax when it comes to profits that are kept by the LLC.
Reasons For Filing A Separate LLC Tax Return
There are a variety of different reasons to file separate LLCs tax returns, and here are a few.
For one, some LLC owners find it easier when the IRS treats their company as a pass-through entity” since the IRS doesn’t want the LLC to file a separate tax return.
Instead, the IRS is happy to accept the LLC’s expenses and income being filed within the single member’s own personal tax returns for that year.
Another reason is that a lender giving a financial transaction loan to the LLC might ask that the LLC file a separate tax return. This is because they want them to in order for them to qualify for the business loan.
A third reason is that your LLC might need to apply for state financial aid. To be eligible, you may have to file a separate tax return.
Final Thoughts
All LLCs have to file tax returns, but they can do so in different ways.
