Organizing a Limited Liability Company (LLC) has become a popular form in which to conduct business, but you won’t find an LLC Tax Return form on the IRS’ website. The Internal Revenue Code (the Code) doesn’t recognize an LLC as a type of entity with its own tax treatment. Instead, LLCs are taxed as if they were one of the other types of entities that are defined in the Code, like chameleons that take on the characteristics of other entities. There are default classifications depending on the number of members there are in the LLC.
If an LLC has only one member, it is called a single-member LLC (SMLLC) and is considered a disregarded entity. A disregarded entity means that the LLC is treated as one and the same with its member, rather than as a separate entity. The activity of a SMLLC owned by an individual is reported on the individual’s Form 1040 and has no separate filing requirement. There is a separate filing requirement, however, for the state of Kentucky. Kentucky has a Limited Liability Entity Tax (LLET) that is assessed on all entities doing business in Kentucky that have limited liability. The LLET has a minimum of $175 annually and increases based on a percentage of gross receipts in Kentucky of $3 million and greater. For SMLLCs, this tax does require a separate form. Form 725 must be filed in addition to the individual’s Federal Form 1040 and Kentucky 740.
The default classification for a multiple-member LLC is as a partnership. This does require a return separate from the members and even if the only two members of the LLC are spouses who file a joint return, a partnership return is still required. Often spouses are surprised that their LLC will generate the additional time and cost of a separate partnership return.
LLCs enjoy the ability to elect out of the default classifications discussed above. Both single-member and multi-member LLCs can elect to be taxed as C corporations or S corporations instead of the defaults, but these elections must be made within a very short time period after the LLC is formed. Kinkead & Stilz, PLLC uniquely employs both attorneys and CPAs who can assist you with forming your LLC and determining the tax classification that is right for you.