LLC Tax Classifications: Sole Proprietorship, Partnership, S Corp and C Corp

An LLC can be taxed in several ways, depending on how it’s structured and the number of members it has. The different tax classifications are:

1.Sole proprietorship

Single member LLC is default a disregarded entity, taxed as Sole Proprietorship. A disregarded entity is ignored by the IRS for federal tax purposes. All business income and expenses are reported directly on the owner’s personal tax return.

2.Partnership

Multi member LLC is default a pass-through entity, taxed as Partnership. The LLC income is passed to the owner’s personal income return. The owner pay personal income tax and self-employment tax(15.3%) on all earned income.

3.S Corp

LLC(single or multi member) can choose to be taxed as S Corp by filing form 2553 to IRS. S Corp is also pass-through taxation entity.

S Corp require you pay yourself a salary and pay employment tax on the salary instead of all the profit. Employment tax is total 15.3%, employer and employee each paying 7.65%.

The distributions you get from the s corp is passed to your personal income, which are subject to personal income tax.

I typically only recommend S Corp when profits exceed 100k due to the administrative burden, QBI deduction, etc.

4.C Corp

LLC(single or multi member) can also choose to be taxed as a C Corp by filing form 8832 to IRS, which is a separate taxable entity. This structure is typically used by larger businesses and can result in double taxation of the company’s income — taxes at the corporate level and taxes at the owner level.