Limited Liability Company (LLC)
A flexible business structure that combines the liability protection of a corporation with the pass-through taxation and operational flexibility of a partnership.
Detailed Explanation
For tax purposes, single-member LLCs are disregarded by default and report on Schedule C of the owner's Form 1040. Multi-member LLCs default to partnership taxation and file Form 1065. LLCs can elect S corporation or C corporation tax treatment by filing Form 2553 or Form 8832. The choice between LLC and S-corp tax election often hinges on self-employment tax savings versus the administrative cost of payroll and corporate formalities.
Key Points
- An LLC is a state-law entity providing liability protection; the IRS does not have a dedicated "LLC" tax category.
- Single-member LLC: disregarded by default, reported on Schedule C of the owner's Form 1040.
- Multi-member LLC: taxed as a partnership by default, filing Form 1065.
- Can elect S-corp (Form 2553) or C-corp (Form 8832) tax treatment when beneficial.
- The S-corp election decision usually turns on self-employment tax savings versus added payroll and admin cost.
Practical Example
A solo consultant forms a single-member LLC. By default she files a Schedule C and pays 15.3% self-employment tax on all $150,000 of profit. As profit grows, she elects S-corp treatment via Form 2553, pays herself an $80,000 reasonable salary, and takes the remaining $70,000 as distributions, saving roughly $10,000 a year in self-employment tax net of payroll costs.
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Learn about Entity Formation & StructuringRelated Terms
S Corporation
A pass-through tax election under Subchapter S of the Internal Revenue Code that avoids corporate double taxation while allowing shareholder-employees to reduce self-employment tax.
Partnership
A business entity owned by two or more persons who share in profits and losses, taxed as a pass-through with each partner reporting their share on their individual return.
Form 2553 (S Corporation Election)
The IRS form used to elect S corporation tax status for an eligible domestic corporation or LLC, generally due within 75 days of the start of the tax year.
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