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A Limited Liability Company (LLC) is structurally divided into two types: single-member LLCs and multi-member LLCs. The former usually has one member, like a sole proprietorship, and the latter can have more than one (at least two) members. When we talk about taxes, a single-member LLC has a comparatively simpler tax structure than a multi-member LLC.
If you’re not new to the world of LLCs, you must know that LLCs have vast tax advantages. They not only have the advantage of pass-through taxation, but also an LLC can elect a different business structure for taxation. But if you’re new to the business world, you must have questions on how to file taxes as a multi-member LLC. In this article, we will share the answers to how, what, and when to file a multi-member LLC tax.
- If an LLC has more than one member, it is called a multi-member LLC.
- The IRS treats a multi-member LLC as a Partnership by default.
- A multi-member LLC has to file Form 1065 as a partnership if not elected otherwise.
- Each member of the multi-member LLC has to file Schedule K-1 for individual tacx filing.
Multi-Member LLC Tax Forms – What to File
Before we go deeper into knowing which tax form to fill out, it is important to know how a multi-member LLC works. A multi-member LLC can be of two types: a member-managed LLC and a manager-managed LLC.
- Member-managed LLC: A member-managed LLC has more than one member (at least two) who are involved in the day-to-day operations and commercial activities. In this setup, two or more members are all actively involved in the company’s decisions.
- Manager-managed LLC: In this setup, the company appoints a manager who heads the management. In the manager-managed LLC, you will have two or more members, but they don’t get involved in day-to-day activities or operations. Some members are silent partners. They may suggest plans, but do not make final decisions.
When it comes to tax filing, both member-managed and manager-managed LLCs file the same forms. The difference is in their setup and responsibilities. Read on about member-managed vs manager-managed LLCs.
Tax Forms for a Multi-Member LLC
The Internal Revenue Service (IRS), by default, treats a multi-member LLC as a partnership. It does not matter how many members are in the company; the IRS treats it as a Partnership. Both member-managed and manager-managed LLCs must file Form 1065 to report their taxes.
But, if the LLC elects S Corporation or a C Corporation as a tax structure, the LLCs will have to file a different form, of course. The following are tax filing options for a multi-member LLC as per the IRS.
As a Partnership – Form 1065
A multi-member LLC can be of any size. Irrespective of the size and number of members, it is called a partnership. Hence, a multi-member LLC, with two or more members, should file FORM 1065. It does not depend on whether the LLC is member-managed or manager-managed.
Though a multi-member LLC is treated as a partnership, it is a bit different from a general partnership structure. Here are some points on how a general partnership is different from a multi-member LLC.
| Features | Multi-Member LLC | General Partnership |
|---|---|---|
| Number of Owners | Two or more | Two or more |
| Owners are known as | Members | Partners |
| Taxation | Pass-through | Pass-through |
| Limited Liability Protection | Provides limited liability protection | Provides limited liability protection |
| Registration/Formation | Required to be registered with the state | Does not require formal registration |
Tax Filing as a Member of a Multi-Member LLC – Schedule K-1 (Form 1065)
Each member of the Multi-member LLC has to file a separate tax form to reflect their income and losses from the LLC. In the case of a partnership structure, each member of the LLC has to file the Schedule K-1 (Form 1065). This is a separate form for all the members in the LLC, irrespective of their positions.
On the Schedule K-1 Form, each member has to share their income, loss, credit, and deductions records to calculate estimated taxes to pay. For some LLC members, Qualified Business Income (QBI) deductions are applicable. While filling out the Schedule K-1 Form, LLC members from the multi-member LLC should share those details, too, if applicable. The QBI deductions depend on a few factors:S income, wages paid, and business types.
A multi-member LLC member might have to pay a self-employment tax based on their income and position in the company. Currently, the self-employment tax rate is 15.3%. Although if the transactions are recorded and reported correctly, an LLC member can enjoy heavy deductions in self-employment taxes.
- For LLC: Form 1065.
- For each member of the LLC: Form Schedule K-1(1065).
As an S Corporation – Form 2553
As mentioned many times, an LLC has the option to choose or elect a specific business structure as their taxation. A multi-member LLC can freely elect an S Corporation as its tax structure to enjoy several benefits.
If an LLC, irrespective of the number of members, elects an S Corporation tax structure, it has to file FORM 2553. Once the form is duly filled out and sent to the IRS, the said LLC will be taxed according to the S Corporation rules, once it is processed. Afterwards, the LLC has to file Form 1120-S to file LLC taxes as an S Corporation.
Tax Filing as a Member of a Multi-Member LLC – Schedule K-1 (Form 1120-S)
Each member of a multi-member LLC that has elected S Corp taxation must file Schedule K-1 in Form 1120-S. Each member (no matter in which position they are) should file Schedule K-1 (1120-S) to share their income, losses, credits, and deductions as an LLC member.
Accordingly, the member is required to pay their taxes. A member from a multi-member LLC might have to pay a self-employment tax. On the other hand, if reported correctly, each member can enjoy deductions on self-employment taxes.
- For Entity Classification Electoion (S Corp): Form 2553.
- For LLC as an S Corp : Form 1120-S.
- For each member of the LLC: Form Schedule K-1(1120-S).
As a C Corporation – Form 8832
A multi-member LLC can easily elect a C Corporation or act like a corporation. Though the structure is different, a multi-member LLC can easily turn into a C Corporation if the members agree to it or, in simple language, vote for it.
When an LLC wants to elect a C Corporation as its preferred tax structure, it has to file FORM 8832. After filing the form, the LLC will be treated as a C Corporation and will be taxed accordingly by the IRS. Once it is accepted and the LLC’s tax structure is converted to the C Corporation, the LLC has to file Form 1120. The LLC has to share its income, losses, deductions, and credit records and calculate the tax accordingly.
As a C Corporation, you do not get to enjoy a pass-through taxation. The LLC now has to pay taxes as an LLC, and the members have to pay their federal income tax based on their overall income. An LLC, whether a member-managed or a manager-managed, has to go through double taxation by electing a C Corporation. Let’s compare how a multi-member LLC and a corporation work.
| Features | Multi-Member LLC | Corporation |
|---|---|---|
| Number of Owners | Two or more | Two or more |
| Owners are known as | Members | Shareholders |
| Management | Member-managed or manager-managed: flexible | Board of directors and shareholders: not flexible |
| Tax structure | Pass-through | Corporate income tax |
| Formation | Articles of Formation/Organization | Articles of Incorporation |
- For Entity Classification Electoion (C Corp): Form 8832.
- For LLC as an C Corp : Form 1120.
- For Members who owns 20% or more share and have 50% or more voting rights: Form Schedule G(Form 1120).
Multi-Member LLC Tax Filing – When to File
Usually, tax filing is done quarterly for a multi-member LLC. It can also be annual or once a year. However, quarterly tax filing is done in 4 months, such as April, June, September, and January. By the middle of the month (preferably by the 15th of the said months), taxes should be filed.
LLCs can also apply for tax extensions that the IRS offers to companies that miss the deadline for any valid reason. The tax filing date can be extended until October 15th every year. If your LLC misses this date as well, it may pay a late filing fee or penalties.
How to Pay Tax for a Multi-Member LLC with a Spouse
When you start an LLC with your spouse, the IRS treats it as a partnership. However, if the LLC is formed in one of the nine community states, then it will be considered otherwise. You can read about the community state laws and forming LLCs with your spouse.
If you are in one of the non-community states, the IRS treats your LLC with a spouse as a partnership by default. If the LLC elects any other types, such as a C Corp or an S Corp, then it will be taxed accordingly. Otherwise, an LLC with a spouse formed in a non-community state, it will automatically be taxed as a partnership.
In Conclusion
A multi-member LLC is treated as a partnership by the IRS, irrespective of the number of members. As a partnership firm, your LLC can enjoy a pass-through tax structure, deductions on self-employment tax, and other options. However, a multi-member LLC can easily elect alternative tax structures, such as an S Corp and a C Corp.
In case of choosing an alternative tax structure, the LLC might have to pay additional taxes as corporate income tax (C Corp), which is also called ‘double taxation’. This means the members are not only paying personal income taxes, but also paying corporate income taxes as an LLC. If your multi-member LLC is larger than just two or three members, it is wise to appoint a professional or CPA to record and report income and losses from each member. It will be hassle-free to take help from a professional rather than do it yourself.