Understanding Tax Treatment of LLCs
The IRS treats one-member LLCs as sole proprietorships for tax purposes. This means that the LLC itself does not pay taxes and does not have to file a return with the IRS. You must report all profits or losses of the LLC on Schedule C and submit it with your 1040 tax return as the sole owner of your LLC.
If you fail to file your taxes on time, you’ll likely encounter a Failure to File Penalty. The penalty for failing to file represents 5% of your unpaid tax liability for each month your return is late, up to 25% of your total unpaid taxes. You do lose the chance of getting that refund if you’re due a refund.
Electing Corporate Tax Status for LLCs
LLCs can choose corporate tax status by making a tax election. This allows the LLC to file taxes as a C-corporation or S-corporation rather than a pass-through entity. To do so, the LLC must file paperwork with the IRS. The LLC will continue operating legally as an LLC even if it chooses corporate tax status for tax purposes.
Filing Tax Returns for a 2 Member LLC
The IRS treats one-member LLCs as sole proprietorships for tax purposes. As the sole owner of your LLC, you must report all profits (or losses) of the LLC on Schedule C and submit it with your 1040 tax return.
If you fail to file your taxes on time, you’ll likely encounter what’s called a Failure to File Penalty. The penalty for failing to file represents 5% of your unpaid tax liability for each month your return is late, up to 25% of your total unpaid taxes. If you’re due a refund, there’s no penalty for failure to file. You do lose the chance of getting that refund.