North Dakota LLC Tax Structure – Classification of LLC Taxes To Be Paid

A limited liability company in general does not have to pay any business taxes. When we talk about the classification of LLC taxes in North Dakota, we know that it is a pass-through taxation structure. Typically, the profit LLC makes passes through the LLC to its members. Based on the profit share, members file their income tax returns. LLCs, unlike other corporations, do not have to pay income taxes based on profit or revenue.

IRS (Internal Revenue Service) allows LLCs to choose their preferable classification of tax at the beginning of the LLC formation. In general, a single-member LLC is taxed as a sole proprietor and a multi-member LLC is taxed as a partnership. As there is no fixed tax structure for LLCs, anyone certainly wants to opt for the most beneficial one. Keep reading till the end to know more about the tax structure of a North Dakota LLC and related aspects.

Classification of North Dakota LLC Taxes

An LLC is considered a Pass-through Entity because it allows the income to pass through & become self-employment income. The members of the LLC have to pay Self-employment tax or Self-Employment Taxes on any income they earn through the LLC. The LLC has to pay Franchise Tax on its income. In addition to the Self-employment tax, there are some other requirements that an LLC has to consider, such as:

1. Franchise Tax – Franchise tax applies to or levies upon LLCs, C-corporations, & S-corporations. Sole Proprietorship & Partnerships (directly owned by individuals) are exempted from the Franchise Tax. This tax is to be paid with the office of the Comptroller of Public Accounts.
2. Federal Tax Identification Number – An LLC with employees must obtain a Federal Tax Identification Number. North Dakota does not have a separate State Tax Identification number.
3. State Employer Taxes – If an LLC has employees on the payroll, it must pay state employer taxes in North Dakota. These taxes are handled through North Dakota Workforce Commission.
4. Franchise Tax Report – In North Dakota, the LLCs do not file a Franchise Tax Report. They need to file an Annual Report with the Secretary of State.

Federal Tax Classifications

When LLCs were recognized as one of the types of Business Corporations, IRS did not create a new tax classification just for the LLC. LLCs were allowed to choose from the current tax classifications.

LLC Taxes to be Paid in North Dakota

Though LLCs do not have to pay any business taxes other than some state taxes, the members are required to pay individual income tax and other federal taxes. Here are some taxes to be paid while having an LLC in North Dakota,

State Income Tax

In North Dakota, LLC members have to pay the state income tax. Depending on their individual income, they pay their share of income tax along with Federal Income tax and other taxes (if applied). North Dakota State has individual income tax rates from 1.1% to 2.9% depending on the range of income. 

State Sales Tax

North Dakota State levies a sales tax rate of 5% for most retail sales. Some of the products and services have different rates of Sales Tax. On new mobile homes and new machinery in agriculture, the rate is 3%. On alcohol, the gross rate is 7%. 

Use Tax

If the Sales Tax is not collected on the purchase of any tangible property (shipped to or purchased in North Dakota) then the Use Tax comes into the picture. In North Dakota, a 5% Use Tax is levied on the tangible property along with the other taxes levied depending on the value of the property. 

Corporate Income Tax

Every corporate that is conducting business in North Dakota has to pay a bare minimum of corporate income tax. There are 3 slabs of corporate income tax to be paid in North Dakota. These are, 

• 1.41% of taxable income for the income slab $0 – $25,000
• $352.55 + 3.55% above $25,000 for the income slab $25,000 –  $50,000
• $1,240 + 4.31% above $50,000 for the income slab $50,000 and above

Federal Employment Tax

Every member of the LLC has to pay the self-employment tax over their profit. In North Dakota, the rate of the self-employment tax is 15.3%. This is pass-through taxation. Other than this, there is an employers’ tax to be paid. Employers who pay wages to their employees are required to withhold a tax rate of 7.65% of their taxable wages.

Federal Income Tax

Federal Income Tax is levied on the individual income of the LLC member. Like the State income tax, the Federal government levies tax on the basis of the income of the LLC member. It is a pass-through tax. 

Default LLC Tax Classification Rules

By default, the LLCs are categorized as below (In both the categories, separate filing of income is not required):

Disregarded Entity (Single-Member LLC)  

A single-member LLC is usually disregarded from the taxes. Hence a single-member LLC is also called a disregarded entity. Under the U.S. tax law, it is assumed that a single-member LLC is owned by an individual (& not by another LLC), so the U.S. tax law levies rules on it as a Sole Proprietor. Single-member LLC’s owner (Sole Proprietor) has to report all the income of the LLC via his own income tax return.

Sole Proprietorship Taxes

As mentioned earlier, the single owner of the LLC is treated as the Sole proprietor of the LLC & has to file the Self-Employment Tax on all of the LLC’s earnings. North Dakota does not levy State Income Tax, so a single-member LLC must file only the Federal Income Tax.

Partnership (Multi-Member LLC)

Any LLC with more than one owner is referred to as Multi- Member LLC & it is taxed as a partnership by default. Similar to the Single Owner or Single Member LLC, this LLC is also a pass-through entity. This means that the income of the LLC passes through the income of the members & they have to file taxes through their own earnings.

Partnership Taxes

Partnership or Multi-Member LLC has to pay taxes similar to the Single Member LLC. If the Partnership LLC is directly owned by individuals, it is exempted from the Franchise Tax. All the members of the Multi-Member LLC are liable to pay Self-Employment Tax & Federal Income Tax.

Options to Change Default Tax Classification

The LLCs are categorized either as sole proprietorships or as partnerships, depending on the number of members the LLC has. This is the default tax classification applicable to LLCs. However, the LLCs have an option of changing the default classification & opting to register under the following categories for taxation purposes:

C-Corporation

An LLC can prefer to be treated as a C-corporation by filing form 8832 (the Entity Classification Election Form) with the IRS. The C-corporation is a regular corporation that is subject to corporate taxes & it is not a pass-through entity. 

C-corporation Taxes

An LLC taxed as a C-Corporation is not a pass-through entity. In a C-corporation, the members/shareholders/ owners are taxed separately. The shareholders of the C-corporation are taxed twice on the dividends that they earn. The dividends of the shareholders are taxed at the corporate level – with a Corporate Tax filed with Form 1120 & at a Shareholder level – an Income Tax filed with Form 1040. Shareholders are subjected to Federal Income Tax.

S-Corporation

The S-Corporation is the most common type of corporate structure used by small businesses. It was created to provide corporations with limited liability protection while maintaining the benefits of being a separate legal entity. An LLC can prefer to be treated as S-Corporation by filing Form 2553. S-corporations are small business corporations, that choose to pass through the corporate income, losses, deductions, & credits to the shareholders for the purposes of Federal Taxes.

S-corporation Taxes

An S-Corporation is similar to an LLC except that it is treated by the IRS as a corporation for tax purposes. S-Corps do pay corporate income taxes; however, they are still considered disregarded entities for federal tax purposes.

Like an LLC, an S-Corp reports its annual earnings on a separate Schedule E on the member’s personal account. An S-Corp is treated by the IRS much like a partnership for tax purposes. Unlike Partnership, in S Corporation,  the shareholders are required to pay Federal Self Income tax on their share of the company’s profits.

Choosing a Classification for Your LLC

In terms of owners’ protection against liability, perpetual existence, & savings in Taxation, Both LLCs (Limited Liability Companies) & Corporations are very much alike. However, with regard to formalities, Taxation, & capital, LLCs & Corporations differ in North Dakota. 

Liabilities

Both LLCs and Corporations provide liability protection to their owners. The LLC provides protection against inside liability (towards the employee) & outside liability (towards the creditor). The Corporation usually provides only the inside liability. 

Tax Classification Flexibility

For taxation purposes, an LLC has a choice of being treated as a sole proprietorship, Partnership or C-corporation or S-corporation. A corporation can choose to be treated only as C or S Corporation.

Taxation

As mentioned earlier, the LLC can choose to be treated as a corporation; the Corporation does not have the option of being treated as the LLC. A North Dakota LLC is subjected to Franchise tax, Federal Income Tax, Sales & Use Taxes & State Employment Taxes (for LLCs that have employees)

A regular corporation or a C- Corporation is subjected to corporate tax, which can be filed through Form 1120 every year. The shareholders have to pay the Income-tax, only when they receive dividends from the Corporation. These dividends are taxed twice at the corporate level (on a corporate form)& at the shareholder level (on shareholder form).

An S- Corporation in LLC is not subjected to corporate taxes. But the shareholders are subjected to Taxation – even if they do not receive any dividends. A member of a North Dakota S-corporation has to pay Federal Self employment Tax only on his salary; any other profits that he makes through the LLC are not subject to the 15.3% Self Employment Tax.

Classification of LLC Taxes – At a Glance

Points of Difference	LLC	S- Corporation	C-Corporation	Sole Proprietorship
Taxation	As an LLC, by default, there is no tax levied at the entity level. The members’ income or even the loss is passed through to members or owners.	Similar to LLC, no tax is levied on an S-Corporation at the entity level. The members’ income or even the loss is passed through to members or owners.	The C-Corporation is often taxed at the entity level. The Dividends are taxed at the shareholders’ level.	The Sole- proprietorship as an entity is not taxable. The Sole Proprietor pays taxes as an Individual.
Double Taxation	The LLC does not have Double Taxation	There is no Double Taxation in S-Corporation	There is Double Taxation in C-Corporation, only when the Shareholders earn in the form of dividends.	No Double Taxation in a sole proprietorship.
Self Employment Tax	The net income of the members or owners is subject to self-employment tax.	The salaries of the shareholder are subject to self-employment tax, but any other profits that the shareholder makes are not subject to the employment tax.	The C-Corporation is subject to self-employment tax.	The Sole-proprietorship is subject to self-employment tax
Pass-Through Income/Loss	An LLC is often referred to as a Pass-through entity because its income passes through/ passes to its members.	Yes, An S Corporation is a Pass-through Entity.	No, A C-Corporation is not a Pass-through Entity.	Yes, A Sole-proprietorship is a Pass-through Entity.

How Do LLCs Pay Taxes in North Dakota

Any LLC operating in North Dakota is liable to pay 2 kinds of taxes- state taxes as well as federal taxes.

Limited Liability Companies (LLCs) have become increasingly popular among entrepreneurs and small business owners due to the numerous benefits they offer, including liability protection and flexible taxation options. While the overall tax structure for LLCs varies from state to state, it is crucial for businesses operating in North Dakota to understand precisely how LLC taxes are paid in the state.

LLCs in North Dakota have the flexibility to choose their tax treatment, which provides business owners with an advantageous degree of control over their annual tax liabilities. By default, a single-member LLC in North Dakota is treated as a disregarded entity for federal tax purposes. This means that the IRS does not recognize the LLC as a separate tax entity, and the business’s profits and losses are reported and taxed on the individual owner’s personal tax return.

For multi-member LLCs in North Dakota, the default tax classification by the IRS is partnership tax treatment. This implies that the LLC itself does not pay any taxes. Instead, the profits and losses of the business are passed through to each member (partners) based on their respective ownership percentages. Each member then reports their share of the LLC’s profits or losses on their own tax return. This arrangement allows the members to enjoy the benefits of both limited liability and more favorable tax treatment.

Alternatively, LLCs in North Dakota can elect to be taxed as a corporation by filing Form 8832 with the IRS. This election may be made if it is deemed more beneficial for the business’s specific circumstances; for example, to take advantage of different tax rates or deductions. However, it is important to thoroughly evaluate the implications and consult with professionals before making this decision, as the IRS imposes specific rules and requirements for taxed LLCs.

Aside from federal taxation, LLCs in North Dakota are also required to pay state taxes. The primary tax levied on businesses is the corporate income tax. However, as previously mentioned, most LLCs in the state opt for pass-through taxation, therefore being exempt from the corporate income tax. However, it’s worth noting that North Dakota does impose a minimum tax (sometimes known as the “corporate franchise tax”) on partnerships, LLCs, and S corporations of $50 per partner, with a minimum total tax of $200.

Additionally, North Dakota imposes a sales and use tax on the sale or rental of tangible personal property and certain services. LLCs engaged in retail, wholesale, or providing services or rentals, must ensure compliance with these tax obligations. Furthermore, depending on the nature of the business, LLCs in North Dakota may need to register and pay specific taxes such as excise taxes, fuel taxes, or specialty taxes related to certain industries.

Understanding the tax landscape is of utmost importance for any LLC operating in North Dakota. Additionally, it is recommended that businesses consult competent tax professionals to ensure compliance and optimize tax planning strategies. Proper tax management not only helps businesses avoid penalties or legal troubles but also enables them to optimize their financial resources and contribute to the state’s economic development.

FAQ

In Conclusion

Every Tax classification has its own set of benefits & restrictions. Every state will have different taxation rules for each of the categories of business corporations. Depending on the objective of formation of the business entity (Eg. To avoid dual Taxation- one can choose S Corporation, for more flexibility, one can choose the LLC format). It is essential to understand the taxing structure of each country & each Classification; to decide how you wish to treat your LLC.