Does an LLC Pay Income Taxes?

In most cases, no, at least not directly. One of the advantages of LLCs is a concept called pass-through taxation. This means the LLC itself does not pay federal income tax, its owners do. Income, profits, deductions and losses “pass through” the LLC and get reported on the owners’ respective tax returns. The default rules for LLCs provide that:

  • The IRS will treat a single-member LLC like a sole proprietorship; thus the LLC will be a disregarded entity for federal income tax purposes. All income, profits, losses, and deductions will get reported on Schedule C of the owner’s Form 1040 individual income tax return.
  • The IRS will treat a multiple-member LLC (an LLC with two or more owners) like a partnership; thus the LLC will enjoy pass-through tax treatment. The LLC will pay no entity-level tax, and all income, profits, losses, and deductions will flow through to the owners to be shared pro rata based on their respective ownership percentages in the company or as otherwise agreed by the owners.
  • Things can get more complicated because the IRS allows LLCs to opt out of the default classifications and elect to be taxed as either an “S” corporation (which has become increasingly common in recent years) or as a “C” corporation (not so common). This special tax election is memorialized on IRS Form 8832.
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