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Forming a Limited Liability Company (LLC) is easier than other business structures. However, the tax filing is not as easy as it looks. If you search for LLC taxation, you will get hundreds of pages stating a bunch of options. However, the question remains as it is, what tax form does an LLC file?
The Internal Revenue Service (IRS) has broadened the tax filing for LLCs. Actually, LLCs can file any type of taxation based on the structure they have or prefer. Be it a larger one, or with multiple members, or run by a single owner, based on that, LLCs can file tax forms. Here in this article, let’s highlight what tax forms an LLC files and how Schedule C, Form 1065, and Form 1120S work for an LLC.
- LLCs have pass-through taxation. No LLC has to pay taxes as a business.
- LLCs file tax forms based on the business structure they elect.
- Schedule C, Form 1065, Form 1120S are different forms LLCs should file based on the election.
- LLCs must elect the taxation structure within the given time period by the IRS.
What Tax Form Does an LLC File
This is one question every LLC asks when the tax season comes around. Before you start your company, you must know that LLCs have a pass-through taxation, which means they do not have to pay any tax as a business. The income or revenue generated from the LLCs will be reflected in the federal income tax return that owners will file individually.
However, this is not as simple as it sounds. LLCs do file tax forms. A limited liability company has the right to elect any business structure for tax filing. For example, if an LLC has two members, the IRS treats it as a partnership. Now, the LLC can file a tax as a partnership, or it can file a tax as a corporation by submitting a different form. Hence, it is solely based on how the LLC elects its tax structure; the tax forms will be filed.
Schedule C vs Form 1065 vs Form 1120S
An LLC can be treated as a sole proprietorship, a partnership, a C-Corp or an S-Corp by the IRS. Based on your preference, you will have to file the form.
| Features | Schedule C | Form 1065 | Form 1120S |
|---|---|---|---|
| Entity Type | Sole Proprietorship (single-member LLC) | Partnership (Multi-member LLC) | S Corporation (Multi-member LLC/Single-member LLC) |
| Pass-through taxation | Yes | Yes | Yes |
| Owner’s Tax Liability | Tax on personal income | Tax on share | Tax on share |
| Double taxation | No | No | No |
| Number of owners | 1 | Unlimited | Less than or equal to 100 |
| Schedule K-1 | No | Yes | Yes |
| Self-employment tax | Entire income | Income from shares | Income from salary and profit distribution |
| Forms | Schedule C (Form 1040) | Form 1065 | Form 1120S |
Schedule C
Schedule C is an individual form that is required when you file your LLC tax as a single-member LLC or as a sole proprietorship. It is part of Form 1040 for individual taxpayers. When you start an LLC with one member or an owner, the IRS considers it a disregarded entity. That means the single-member LLC will not be liable to pay any taxes as a business entity.
The owner’s or the member’s income generated from the LLC he/she holds will reflect in their personal income tax return along with other incomes (if any). Hence, the LLC owner will be liable to pay taxes based on his/her all their income in a year, not just the income from the LLC.
So, a single-member LLC will file Form 1040, and if the LLC elects sole-proprietorship taxation, they have to file Schedule C on Form 1040.
Form 1065
Form 1065 is used for partnership companies. As an LLC, if you have more than one member, a minimum of two, the IRS considers it a partnership company. In such cases, LLCs can file this form as a partnership and are liable to pay taxes accordingly.
In general, for a Partnership taxation, each partner is liable to be taxed based on their capital contribution or share in the company. The Schedule K-1 (Form 1065) is to be filed by each owner to show their income from their share in the partnership, deductions, and credits.
Each LLC member, in Partnership, generally pays the self-employment tax based on their income earned from the LLC’s share (owned by each partner). For Partnership taxation, LLC members can still enjoy the pass-through taxation.
Form 1120S
Form 1120S is for LLCs that elect the S-Corp tax structure. In general, an LLC can elect C-Corp and S-Corp as a tax structure by filing Form 1120 and Form 1120S, respectively. A qualified LLC that elected S Corporation as its tax structure has to file Form 1120S. Each member of the LLC has to show their income from the LLC, any deductions, and credits by filing Schedule K-1 (Form 1120S).
Form 1120 is for the C Corporation tax structure. If an LLC, even with a single member, wants to elect a C-Corp tax structure, it needs to file this form.
Which Form Should an LLC File? Schedule C vs 1065 vs 1120S
As a beginner, this question must have crossed your mind several times. Not only is it important to comply with the IRS while filing your taxes as an LLC, but it is also wise to choose a structure that helps you save the maximum amount of tax.
Now, the answer depends on your LLC’s growth. For example, if you want to run a family business, a partnership should be the best option here. On the contrary, if you are a single-member LLC and willing to expand in the future, go for an S-Corp structure. It saves a lot more tax than that of a Partnership. In general, you may save around 10-15% tax amount on self-employment as an S-Corp than as a Partnership.
All you have to think about is how you want your company to be in the next 5 years. If you are an artist, selling your art to your clients, the IRS will treat you as a sole proprietorship by default. But if you elect an S Corporation, it will be beneficial for your LLC as an entity.
Change of Default Tax Structure
Here’s another glitch you may face as an LLC. As I have discussed earlier, LLCs can be treated as a Sole Proprietorship or a Partnership based on their formation structure. Now, there remains a question: what if your LLC’s core structure changes? Will that affect your taxation?
The IRS has elaborated on this issue in their official LLC publication. In simple language, the answer is yes and no. Yes, your taxation will change if you go by the default structure, and the answer will be a No if you elect a specific tax structure.
For example, let’s say you start your LLC with two members. The IRS will treat it as a Partnership by default. Later on, if one member leaves the company, it goes back to a sole proprietorship or a single-member LLC. But, if the LLC has already filed Form 8832 and elected a Corporation structure, even with one member, the IRS will treat it like a Corporation.
In Conclusion
The Internal Revenue Service (IRS) has provided LLCs with the option to elect any tax structure they wish. Whether you are a single-member LLC or a multi-member LLC, you can change your tax structure from default to something completely different.
As many beginners get confused about which tax structure to elect, it is wise to elect an S Corporation over other structures (unless it is absolutely necessary) to save maximum tax. However, if your LLC has more than one member, it will be easier to elect Partnership taxation. In general, the answer to the question “Which Form an LLC Should File?” cannot be said in one word. It depends on how your LLC will grow in the future. You can also hire or consult an expert or a lawyer to discuss the best options for your LLC.