Form K-1: Taxation Of An LLC

Taxation of an LLC

Like a partnership, a limited liability company is a pass-through entity, a tax structure designed to avoid double taxation. An LLC is a non-tax entity. Its profits and losses are reported on its members’ individual tax returns. The members are responsible for paying taxes on the LLC's profits. In practical terms, an LLC, like a partnership, serves as an agent for the Internal Revenue Service (IRS) in collecting and reporting tax data about the company’s income and expenses. The LLC files an annual tax return (IRS Form 1065) to report relevant tax data to the IRS. The LLC reports each member’s share of the profits or losses annually on an IRS Form K-1. The members use the information included on Form K-1 to report their respective share of the LLC’s profits and losses on their individual tax returns (IRS Form 1040).

The Internal Revenue Service has special rules allowing an LLC to be treated for tax purposes as either a corporation or a partnership. For example, the IRS classifies a limited liability company with at least two members as a partnership for tax purposes. However, members may elect by filing IRS Form 8832 to be classified and taxed as a corporation. An LLC with only one member is treated like a sole proprietorship for income tax purposes with its income reported on the individual member’s tax return (IRS Form 1040). However, a single-member LLC may also elect by for filing IRS Form 8832 to be treated like a corporation for income tax