It’s tax time! My “Ask An Accountant” series should help with many questions that may arise. Remember, if you have a tax question, email my husband who is an experienced accountant at firstname.lastname@example.org.
Instead of a question and answer this week, I’d like to attempt to clarify the confusion that seems to surround LLC/S-corp statuses and filing:
LLC stands for Limited Liability Company. This is a legal classification of business not recognized by taxing authorities. There are two general types, single member LLC and multi-member LLC. Single member can only have 1 member, multi-member must have more than 1 member.
An LLC’s main function is to provide a legal separation of business assets & liabilities from personal. This legal strategy comes with certain tax attributes. The LLC can provide unlimited losses without regard to the member’s basis (amount of money/property invested, earned & left in the business). The LLC also pays Self-Employment tax on any profits (a very nasty 15% in addition to your normal tax rate). Single member LLC files a Schedule C on your individual return; a multi-member LLC can opt to file a Form 1065 return (the same return as a partnership) or can elect to file Schedule C for the member’s potion of the Income or Loss.
A “Tax Election” can be made for both the single member LLC and the multi-member LLC to be taxed as an S-corp. The entities still operate as LLC’s but take on S-Corp tax attributes in that they no longer pay Self-Employment tax on the profit, but rather they report the income (from a K-1) on their personal tax return. The downfall is that the losses are now limited by the member’s basis in the company.