An LLC, or limited liability company, is a lightweight business structure that melds the flexibility of a partnership with the limited liability of a corporation. LLCs are organized under state rules, and for federal purposes, may be treated as a partnership, corporation, or as part of the owner’s personal taxes. While it doesn’t have the typical tax savings other business entities do, it’s a lot less confusing.
In an LLC, all profits and losses are passed from the business to each member. Members report profits and losses on their personal federal tax returns, just like the owners of a partnership would. If an LLC has at least two members, it is generally classified as a partnership. Therefore, members can pay themselves by taking a distribution of their portion of the profits. This amount is reported as part of the Schedule K-1. You’ll need to pay taxes on this amount on your personal income tax returns.
Sometimes, an LLC may elect to be treated as a corporation for tax purposes. When that happens, you could get wages from the corporation rather than a distribution. That distinction can get thorny, so be sure to check with your tax advisor to see how your LLC is treated.
Updated September 26, 2017