Q: I want to set up an LLC, but I don’t understand how it is taxed. Please help!
A: It’s pretty simple, really. There are two types of LLC’s- single member (owned by just one person) and multiple member (owned by several people). Both forms have “flow through” taxation; that is, the taxes flow through to the individual income tax returns of the owners.
Single member LLC’s are taxed like sole proprietorships, and the net income (the profit, in other words) gets taxed to the owner (member) on his/her 1040. Multiple member LLC’s are taxed like partnerships. Each owner pays taxes on his/her 1040 based on the percentage of membership. For example, if two people are members of an LLC, and each has 50% membership, each will be taxed on 50% of the profits. In the case of multiple owners, the “partnership” also files a 1065 – Information return.
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