A Limited Liability Company (LLC) is a business structure allowed by state statute, but IRS does not recognize LLC on tax purpose. The IRS treats an LLC as either a partnership, or a corporation depending on the number of members and elections made by the LLC.
For income tax purpose, a single member LLC is treated as a sole proprietor by default. In this case, the LLC does not need to pay income taxes or file a tax return with the IRS. The LLC’s net income, income, and expenses items are reported on the member’s personal tax return (assume the member is individual).
A domestic LLC with at least two members is classified as a partnership for federal income tax purposes by default. As a pass-through entity, an LLC needs to file tax return for the business, but does not pay entity-level taxes on its income; instead, profits and losses pass through to the members, then the members will report the apportioned profits/losses on their own income tax returns with applicable tax rates, regardless of whether the income is distributed or not. If the LLC is profitable but does not distribute any cash to the owners, the owners are still subject to tax on the income of the LLC. If the LLC has a loss, then the owners can take advantage of company losses on their own tax returns.
By filing Form 8832 to IRS, an LLC, regardless of number of members, can elect to be treated as a corporation for income tax purpose. A corporation's income may subject to double taxation. A corporation must pay taxes on its income when earned, and the shareholders must pay taxes on any dividends or other distributions they received from the corporation. However, the corporation can choose to retain the earnings to finance growth and reasonable needs of the business up to USD 250,000 (USD 150,000 for personal service corporation) to avoid double taxation. Accumulated Earnings Tax with tax rate 20%, in addition to regular income tax, will be applied on corporations for unreasonably accumulating earnings exceed USD250,000 (USD 150,000 for personal service corporation).
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