How LLC Taxes Work

If you're the sole owner of your LLC, the IRS will consider it a disregarded entity and you'll report all profits and losses on a Schedule C tax form ("Profit or Loss from Business"), which you'll submit with your 1040 form. If your business is providing a service or selling a product, you'll also pay self-employment taxes on any profits using Schedule SE ("Self-Employment Tax"). However, if your company is involved in a passive business (e.g., rental activity), no self-employment taxes need to be paid. Instead, you'll report profits via Schedule E ("Supplemental Income and Loss"). Note that should you decide to leave some of your business' profits in the bank at the end of the year (e.g., to cover future expenses or for growth), you'll still have to pay income tax on that money.

Does your new business have two or more owners? Then the IRS will automatically classify it as a multi-member LLC, or partnership, for federal income tax purposes. As with a single-member LLC, your LLC won't pay taxes. Instead, each owner will pay a portion of the LLC's taxes on her personal income tax return. The amount of taxes each member pays is generally in proportion to her interest in the business. So if Molly owns 40 percent of the company, Maura owns 30 percent and Ella owns 30 percent, Molly gets 40 percent of the LLC's profits and is responsible for 40 percent of its losses, while the corresponding share for the other two is 30 percent. It's possible to split up the profits and losses differently; to do so, however, you'll need to request a "special allocation" from the IRS. As is the case with single-owner LLCs, you must pay taxes on your share of the profits annually, even if you leave your money in the bank [sources: Beesley, Laurence].

A final note. Although your multi-member LLC doesn't pay taxes, the partnership must file a Form 1065 ("U.S. Return of Partnership Income"). This informational document lets the IRS check and make sure each owner is reporting her income properly. Correspondingly, each LLC owner must attach Schedule K-1 ("Partner's Share of Income, Deductions, Credits, etc.") to her Form 1040,which shows her share of the LLC's profits and losses [source: Beesley].