Default Rules for LLC Taxation

Because a limited liability company may elect how it will handle its tax accounting, the Internal Revenue Service provides default rules.

You use the default rules until you make an election to use one of the other tax accounting approaches avaiable.

Rule for One-owner Limited Liability Company

By default, a single member LLC is disregarded. In other words, you just ignore the one owner LLC. (The owners of an LLC are called "members")

This sounds tricky, but the "disregarding" or "ignoring" just means that the income or deductions of the LLC go on the owner's regular tax return.

For example, if an individual owns an LLC that operates an active trade or business, the LLC's income and deductions go on the "Schedule C Profit or Loss From Sole Proprietorship" page of the person's tax return.

And if an individual owns an LLC that holds rental property, the LLC's income and deductions go on the "Schedule E Supplemental Income and Loss" page of the person's tax return.

In other words, the fact that the business or real estate is operated or owned by an LLC is irrelevant for tax accounting. The LLC is, in the language of tax law, disregarded.

Husband and Wife LLCs

And another interesting little wrinkle here: An llc owned by a husband and wife who reside in a community property state can be treated a as a single-member, or one owner, llc, meaning that such an llc can also be disregarded.

LLCs Owned by a Corporation or Partnership

If the owner of the LLC is a corporation or partnership, the LLC is a single member, or one-owner, LLC.

In this case, the LLC's income and deductions just get combined with the corporation's or partnership's other income and deductions and appears on the corporation's or partnership's tax return.

Rule for Multiple Owner Limited Liability Company

A multiple member llc by default is treated as a partnership. This means that the LLC's income and deductions get reported on a partnership tax return. And then that tax return allocates the income and deductions among the partners, or LLC members.

Each partner, or LLC member, receives a K-1 from the partnership. The K-1 shows that partner's share of the income and deductions flowing out of the partnership.

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