Common Pitfalls In Filing Your LLC Taxes

The type of limited liability corporation (LLC) determines the LLC tax. An LLC that has a single member or owner files their taxes on the Form 1040 U.S. Individual Income Tax Return and Schedule C Profit or Loss from Business (Sole Proprietorship). This is because a single member LLC is treated like a sole proprietorship and income derived from the LLC is treated as the owner’s income.

Multi-Member LLCs

A multi-member LLC, which is one that has 2 or more owners, files their taxes using Form 1065 U.S. Return of Partnership Income and Schedule K-1 Partner's Share of Income, Credits, Deductions, etc. The income of a multi-member LLC is treated as partnership income and passed on to the individual members for reporting.

Accounting for Share of Profits and Losses

A filing for a single member LLC is easier to accomplish than that for a multi-member LLC.  This is due in part to the fact that a multi-member LLC needs to maintain books and records that indicates the equal distribution or pro rata share of profits and losses split among the members.  The greater the number of members, the more complicated this accounting can become. The use of accounting software as well as the services of a qualified certified public accountant (CPA).

Quarterly Tax Reporting

An LLC provides a liability shield to its members in a form that is similar to a limited partnership without the complication of dissolution or other acts that can end a partnership when a partner dies or leaves. This liability shield protects personal assets of the LLC members from loss due to any actions of the LLC as a corporation. In this form however, am LLC is responsible for maintaining accurate business and financial records that indicates the flow of profits, losses, income and expenses and provide a report of estimated taxes no less than quarterly. Another common pitfall of an LLC has to do with the ongoing quarterly reporting of profits and losses to the Internal Revenue Service (IRS).