A limited liability company (LLC) is a business structure that protects its owner(s) from being personally liable for the business’ debts . Whether you currently operate an LLC or are thinking of turning your freelance operation into an LLC, it’s important to know the tax basics and benefits of running one. Understanding all your obligations for declaring income and paying taxes at the federal and state levels is the best way to avoid being audited by the IRS.
While LLCs offer members (owners) a large degree of the same protection that corporations enjoy, they sometimes utilize a different system for tax payment. With an LLC, profits and losses pass through the entity itself and onto the owner(s), who must then report them on their individual tax returns. For this reason, LLCs are considered “pass-through” entities, and for tax purposes, considered similar to a sole proprietorships or partnerships, based on the number of LLC “members,” or owners.
It’s important to note that LLCs are sanctioned according to state laws, not by the IRS. Furthermore, based on your state’s laws, you may have a choice in electing to have your LLC designated and taxed as a corporation. If your LLC is not classified from the onset as a corporation, you can elect to have it taxed as one using IRS Form 8832. Visit the IRS website for more information about limited liability company tax obligations.