Tax Choices for the
Limited Liability Company in Texas
One of the reasons the
limited liability company in Texas is so popular for small business is because
the TX limited liability company gives business owners the most tax choices over any other
legal entity when it comes to federal income taxation. This
Article summarizes the tax choices and then gives links to helpful
resources.
The Texas Single Member LLC Has Three Tax Choices
A Texas single member LLC has the
choice of
(i) Being disregarded as a separate entity for tax purposes;
(ii) Being taxed as a C corporation; or
(iii) Being taxed as an S corporation if the TX LLC and the Member
meets the
S corporation rules.
The default tax rule is to be
disregarded and taxed as a sole proprietor. In this case, the
TX limited liability company's income is taxed federally on the single member's own personal tax
return. You will report the LLC income on Schedule C of the
Form 1040. If you prefer this method of taxation for your LLC,
your LLC does not have to file any tax choice form when it is
formed.
Remember, this is only a tax
classification, the Texas single member LLC is definitely recognized as an
entity separate and apart from the Texas single member LLC for all other
purposes which means you still get the benefit of legal liability
protection.
If a single member LLC in
Texas wants to
be taxed as a C corporation for federal tax purposes, the TX limited
liability company will need to file IRS Form 8832
no later than 75 days from formation of the LLC. If the
Texas single member LLC wants to elect S corporation status and as a
result be taxed under the partnership tax rules, the TX limited
liability company will have
to file IRS Form 2553 (known as the S Election Form).
If your Texas single member is taxed as a C
corporation, the income tax return to be filed is the Form 1120. If your
TX limited liability company is taxed as an S Corporation, the tax return Form 1120S is filed.
The Texas Multi-Member
LLC Has Three Tax Choices
A Texas multi-member LLC
also has three tax choices:
(i) Taxed under the partnership tax rules (known as a single layer
of taxation);
(ii) Taxed as a C corporation; or
(iii) Taxed as an S Corporation if the LLC and its Members meet the
S corporation rules.
The default rule
is the partnership tax structure. In this case, the TX limited
liability company will
file an informational return with the IRS (Form 1065). The LLC
will be required to give each Member of the TX limited
liability company a K-1 tax form for
each tax year. Then each LLC Member will report the LLC's
income and losses on his/her own tax return.
The tax election
requirements for a Texas multi-member LLC desiring corporation tax status
is the same as for a single member LLC. If a Texas multi-member LLC
wants to be taxed as a C corporation, the TX limited liability
company
will need to file IRS Form 8832 no later than 75 days from
formation of the LLC.
If the Texas multi-member LLC wants to
elect S corporation status and as a result be taxed under the
partnership tax rules, the TX limited liability company will have to file IRS Form 2553
(known as the S Election Form) and this must be filed no later than
75 days from formation of the LLC. Otherwise, you will have to
wait until the following tax year before electing.
If your Texas multi-member LLC is taxed as a C
corporation, the income tax return your LLC will file is Form 1120. If your
TX limited liability company is taxed as an S Corporation, the Form 1120S is filed.
S Corporation
Status Has Strict Requirements
If your TX limited liability
company is contemplating an
S corporation tax status, it is important to know that your Texas LLC and
its Members must meet the same requirements that a corporation must
have before qualifying for S corporation status.
The major requirements are:
-
The LLC must have less than
100 Members
-
All Members are required to
be individuals (some trusts and estates can qualify but a Member
cannot be a corporation or another LLC)
-
All Members must be US
citizens of permanent residents
-
There can only be one class
of Membership Interests
-
The tax year should
generally be the calendar year
Many small businesses will meet
the requirements but it is important you review the requirements
(included in the Instructions to Form 2553 below) or seek the advice
of your accountant.
