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What You

Should 

Know Abou

Limited Lia

Companies

Tax Issues

for

Limited

LiabilityCompanies

What is a Limited LiabilityCompany?

A Limited Liability Company (LLC) isa relatively new business structureallowed by state statute.

LLCs are popular because, similar toa corporation, owners have limitedpersonal liability for the debts andactions of the LLC. Other featuresof LLCs are more like a partnership,providing management exibility and thebenet of pass-through taxation.

Owners of an LLC are called members.Since most states do not restrictownership, members may includeindividuals, corporations, other LLCsand foreign entities. There is nomaximum number of members. Moststates also permit “single member”

LLCs, those having only one owner.

A few types of businesses generallycannot be LLCs, such as banks,insurance companies and nonprotorganizations. Check your state’srequirements and the federal taxregulations for further information.1

There are special rules for foreignLLCs, which are not covered in thispublication.

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Publication 3402 (Rev. 3-2008)Catalog Number 27940D

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Employer IdenticationNumbers (EINs)

 General information on EINs is providedin Publication 1635.

Are there any Pitfalls?

There are two common situations whereunintentional errors may occur:

1. If you convert an existing business, such asa corporation, into an LLC there may be taximplications, such as:

 The conversion may result in a taxablegain;

 Employment tax wage bases may beaffected.

2. Special rules may apply when your LLC

has an operating loss:

 The amount of loss you can deduct maybe limited because of your limited liabilityfor LLC debts.3

 Passive Activity Loss limitation mayrestrict the amount of loss you candeduct.4

If either of these situations applies to you,professional advice may be needed.

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How do I handle EmploymentTaxes?

Employment tax requirements apply toLLCs in much the same way as other typesof businesses.

Information Reporting

 Employees of all LLCs are subject towithholding taxes.

 Forms W-2 and Forms 1099 must beled when required.

As a member, your liability for LLC debts arelimited by state law. However, you may beheld personally liable in situations involvingunpaid employee withholdings if you arefound to be the person responsible formaking the payments.2 

Self-Employment Taxes

1. LLCs ling Schedule C or F

 Members are subject toself-employment taxes on earnings.

2. LLCs ling Partnership Returns

 Generally, members payself-employment tax on their share ofpartnership earnings.

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Here are some places wcan nd out more about fissues for Limited Liabilit

What If I Need MHelp?

Tax Assistance by tel

1-800-829-1040

Order forms by teleph1-800-829-3676

IRS on the Internet:www.irs.gov.

Publication 15 (Emp loyer ’sTax

Publication 334 (TaxGuideforS

Publication 541

(Partnerships)

Publication 542 (Corporations)

Publication 1635 (Understanding

Form 8832 (Enti ty Classif ica

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1 Treasury Regulations Section 301.7701-1,-2,-3 2 Internal Revenue Code Section 6671 and 6672 3 Internal Revenue Code Section 4654 Internal Revenue Code Section 469

What Kind of Tax ReturnDo I File?

1. Single member LLCs.

Generally, when an LLC has only onemember, the fact that it is an LLC is ignoredor “disregarded” for the purpose of ling afederal tax return.1 

Remember, this is only a mechanism fortax purposes. It doesn’t change the fact thatthe business is legally a Limited LiabilityCompany.

 If the only member of the LLC isan individual , the LLC income andexpenses are reported on Form 1040,Schedule C, E, or F.

 If the only member of the LLC isa corporation, the LLC incomeand expenses are reported on thecorporation’s return, usually Form 1120or Form 1120S.

If you prefer to le as a corporation instead ofas a “disregarded entity” Form 8832 must besubmitted. Otherwise, you don’t need to leForm 8832.

Single-member LLCs may not le apartnership return.

2. Multiple Member LLCs

Most LLCs with more than one member le apartnership return, Form 1065. If you wouldrather le as a corporation, Form 8832 mustbe submitted.1 You don’t need to le a Form

8832 if you want to le as a partnership.

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