The Tax Regime of an LLC
A Limited Liability Company (hereinafter "LLC") is a company incorporated under US law, organized according to state laws, of a hybrid type, which guarantees both limited liability to shareholders for the debts of the company, as happens in corporations, both the tax advantages and operational flexibility typical of partnerships. The members of an LLC are called "members" and, depending on the state in which the company was established, LLC can be set up with only one "member", called unipersonali, or made up of several "members", be they natural persons, other LLCs, ie joint stock companies.
An LLC, for federal tax purposes, can be classified as:
- an "entity disregarded" (a company not subject to any taxation, whose income tax return is fully reported in that of its partner - but only for unipersonal companies);
- a “partnership” ;
- a "corporation".
However, an LLC may decide to be classified as a "corporation" or "S corporation". This distinction between "corporation" and "S corporation" detects and is applied merely for tax purposes, as specified below.
In any case, an LLC may decide to change its classification.
LLC classificate come entity disregarded as separate from its owner
If an LLC has a single shareholder and is classified as "entity disregarded as separate from its owner", the turnover, tax deductions, profits, losses and credits of this LLC are reported in the tax return of the sole shareholder, which will be filled in through the 1040 Model of the Internal Revenue Service. However, this type of company is treated as a separate company for tax purposes by its partner, with reference to taxes on labor and excise duties. If the corporate structure of such a classified LLC is expanded with the entry of a second partner, for tax purposes it is automatically considered as a partnership ("partnership"). This change in "partnership" does not take place if the single-member company had deliberately decided to re-enter, albeit with a single shareholder, in the "corporations" category.
LLC classified as a partnership
The LLCs classified as "partnerships" do not pay taxes directly on their turnover. Each member pays the fees related to the shareholding held in the LLC in his own tax return. In any case, this type of LLC must complete Form 1065 of the Internal Revenue Service, in which it is necessary to report, among other things, the turnover, gains and losses recorded, although the company is exempt from the payment of income taxes. As a rule, the By-laws provide, for this type of LLC, that the distribution of profits and losses takes place in proportion to the share held by each individual shareholder. Therefore, every member of a classified LLC has the obligation to pay the taxes related to the profit generated by the company with regard to its own share, even if the LLC does not distribute all the profits among the members.
LLC classified as S corporations
The definition "S corporation" derives from the subchapter "S" of the Internal Revenue Code issued by the IRS ("Internal Revenue Service" or the US Revenue Agency). In this chapter it is specified that corporations with characteristics, among others, such as a number less than or equal to 100 members, all natural persons of US nationality or having permanent residence in the United States, although established as a capital company can enjoy the tax regime guaranteed to partnerships. This means that any profit generated by the company is not taxed at corporate level, but is included in the calculation of the taxation of each individual member. Nevertheless the LLCs classified as "S Corporations" must complete the Model 1120s of the Internal Revenue Service (US Revenue Agency). Generally the decision to classify an LLC as an "S corporation" is taken if the shareholders decide to spend the greater part or all the profits generated by the same LLC and do not decide to leave such profits within the company. This is because the members can receive profits in the form of dividends, which are exempt from taxation related to social security and public health assistance. If the LLC does not comply with all the characteristics of an S corporation, it is automatically taxed as a corporation, therefore following the regime described below relating to this type of company.
LLC classified as corporations
Finally, an LLC can choose to be classified as a corporation for tax purposes. This means that the LLC is taxed separately by the members and must present its tax return by completing the 1120 Model of the Internal Revenue Service. The profits generated by the LLC remain within the same and at the end of the fiscal year are taxed, applying the rate corresponding to that applied to corporations. Subsequently, profits are taxed a second time, when they are distributed to shareholders in the form of dividends. The dividends are always taxed as income, regardless of their source. Finally, the shareholders can autonomously choose the start date of the LLC fiscal year, which must not necessarily coincide with the beginning of the calendar year.