Tax forms keep all businesses, including limited liability companies (LLCs), compliant with tax laws. Depending on how an LLC is set up in the United States, it might use different forms to report information such as income, expenses, and profit to the Internal Revenue Service (IRS). Getting these forms right and turning them in on time keeps the business out of trouble and helps maintain its legal status.

These tax forms also help manage the business. They can reveal allowable business expenses that lower the company’s overall tax bill. For LLCs with more than one member, they break down how profits or losses are split up for clarity among partners. They provide a clear financial picture, support planning, and keep business finances in check for investors and other people connected to the business. Below, we’ll discuss what LLCs need to know about tax forms, including how to file them, the documents you need, and more.

What’s in this article?

• How to form an LLC
  
• LLC tax filing fundamentals
  
• What business records and documentation do LLCs need?
  
• Annual taxes for LLCs
  
• Common LLC fees and underpayment
  
• How to cancel your LLC
  

How to form an LLC

Before you consider your tax forms, you’ll need to establish an LLC. Here’s a step-by-step guide to forming one:

• Choose a name for your LLC: Your LLC’s name must be unique and not already in use by another business in your state. It also usually needs to include “LLC” or “Limited Liability Company”. You can check name availability through your state’s business filing office or website.

• Select a registered agent: Every LLC must have a registered agent, which is a person or business entity responsible for receiving legal documents on behalf of the LLC. The agent must be available during regular business hours and have a physical address in the state where the LLC is registered.

• File articles of organisation: This is the main document required to formally register your LLC with the state. It typically includes the LLC’s name, address, registered agent information, and sometimes the names of the members. You’ll need to file this document with your state’s secretary of state office or a similar entity and pay a filing fee.

• Create an operating agreement: Although an operating agreement is not required in every state, it’s wise to create one. This internal document outlines the ownership and operating procedures of the LLC to help prevent conflict and misunderstandings.

• Obtain an Employer Identification Number (EIN): An EIN, sometimes called a federal tax identification number, is required to open a business bank account, file federal taxes, and hire employees. You can apply for an EIN for free through the IRS website.

• Register for state taxes: Depending on where your LLC is located and what kind of business you’re doing, you might need to register for state taxes, such as sales tax and employer taxes.

• Comply with local permits and licenses: Check with your city and county to determine if you need any specific permits or licences to legally operate your business.

LLC tax filing fundamentals

Flexible tax filing can be a major advantage for LLC owners. Here’s what to know about filing these taxes.

Default tax classifications

Single-member LLCs are treated as disregarded entities by default so they’re taxed the same way as sole proprietorships. The owner reports business income and expenses on their personal tax return using Schedule C, which is part of Form 1040.

Multimember LLCs are treated as partnerships by default. They must file information returns on Form 1065. Each member then receives a Schedule K-1 that shows their share of the LLC’s income, deductions, and credits, which they report on their personal tax returns.

Electing corporation status

LLCs have the option to be taxed as a corporation by filing IRS Form 8832. They can then choose to be treated as an S corporation (S corp) or a C corporation (C corp). Here’s the distinction:

• C corp status: If the LLC elects to be treated as a C corp, it files its own corporate tax return using Form 1120 and pays taxes at the corporate rate. This setup can help owners lower their overall tax liability but also leads to double taxation of dividends.

• S corp status: Electing S corp status (using Form 2553) can help LLC owners save on self-employment taxes. Profits and some losses are passed through to owners’ personal tax returns and taxed at individual rates, but only salaries drawn from the business are subject to self-employment tax.

Employment taxes

If the LLC has employees, it must pay employment taxes. This involves withholding the proper amount of federal, state, and sometimes local taxes from employees’ pay and paying the employer’s share of taxes.

State taxes

LLCs might also need to pay state-specific taxes such as state income tax and franchise taxes. These taxes are determined by where the LLC operates and the nature of its business.

Quarterly estimated taxes

If the LLC’s income isn’t subject to withholding, members might need to make quarterly estimated tax payments to cover their expected tax liability.

What business records and documentation do LLCs need?

LLCs need to maintain a range of business records and documents for legal compliance, financial transparency, and general operations. Here’s a look at what LLCs should keep on record:

• Articles of organisation: This is the document filed with the state to legally form the LLC. It includes basic information such as the LLC’s name, address, and the names of its members.

• Operating agreement: Although it’s not required in every state, an operating agreement is highly recommended. This outlines the ownership structure, member roles, profit distribution, and procedures for handling changes and dissolving the LLC. It serves as an internal manual for running the LLC.

• Meeting minutes: If an LLC holds meetings, particularly those with multiple members, it’s important to keep minutes of these meetings. This documentation should include decisions made, actions approved, and members’ votes on specific issues.

• Bank statements: Regular bank statements for all accounts under the LLC’s name.

• Receipts and invoices: Bills and payment receipts for all transactions, including both income and expenses.

• Accounting books: Detailed records of all financial transactions including income statements, balance sheets, and cash flow statements.

• Tax returns and documentation: Copies of filed tax returns and any related documents, which might include elections for tax status.

• Contracts and legal documents: Any contracts the LLC is a party to, including lease agreements, service contracts, and partnership agreements, as well as any legal documents related to licensing, trademarks, or other intellectual property.

• Employee and independent contractor records: Any employment-related records including employment agreements, tax forms (such as W-2s and 1099s), and details of benefits offered.

• Regulatory paperwork: Any required regulatory documents, such as health and safety inspections, professional licences, and environmental permits.

• Insurance documents: Policies and claims documents related to any business insurance including liability, property, and workers’ compensation insurance.

Annual taxes for LLCs

Annual tax obligations for LLCs vary depending on their classification and state requirements. Some industries, such as alcohol or tobacco sales, have additional tax requirements. Here’s what most LLCs can expect to pay.

Federal taxes

Single-member LLC (disregarded entity)

Single-member LLCs report income and expenses on Schedule C (Form 1040) along with personal income. The owner will pay self-employment taxes (Social Security and Medicare) on LLC income and might need to make estimated tax payments throughout the year.

Multimember LLC (partnership)

Multimember LLCs must file Form 1065 (information return) to report income and deductions. The LLC must issue Schedule K-1 to each member and members must report their shares on their personal income tax returns. Members might need to make estimated tax payments.

LLCs taxed as S corps or C corps

Single-member LLCs that elect to be taxed as S corps or C corps must file Form 1120-S or 1120, respectively. The LLC pays corporate income tax and distributes profits to the owner as taxable dividends.

State taxes

• State income tax: Most states require LLCs to pay income tax on their profits. Rates and rules vary by state.

• Franchise tax: Some states impose a franchise tax on LLCs for doing business in the state.

• Sales tax: LLCs that sell goods or certain services might need to collect and remit sales tax.

• Employment taxes: LLCs with employees must withhold and pay payroll taxes.

Common LLC fees and underpayment

If you underpay fees for operating an LLC, you could be subject to potential penalties or compliance issues. Here’s a detailed look at common fees for LLCs:

• Formation fees: These are one-off fees paid to the state when you initially form your LLC. They include the cost of filing the articles of organisation. The amount varies by state but typically ranges from $50–$500.

• Annual report fees: Most states require LLCs to file an annual or biennial report, which updates the state on the LLC’s activities and current contact information. Fees for these reports vary by state but generally range from $20–$300.

• Franchise taxes: Some states impose a franchise tax on LLCs. For example, California has an annual franchise tax of $800.

• Registered agent fees: LLCs are required to have a registered agent in the state where they are registered. If you hire a professional registered agent service, this can cost anywhere from $100–$300 annually.

• License and permit fees: Depending on the type of business and its location, various local licences and permits might be required. These can vary widely in cost.

LLCs that fail to pay these fees on time or otherwise fail to comply with requirements can incur these financial penalties:

• Late fees and interest: If an LLC fails to pay the required taxes or fees on time, the state and IRS can impose late fees and interest charges. These can accumulate until the outstanding obligations are settled.

• Penalties for noncompliance: More severe penalties can be assessed for failing to file the required reports or tax returns. These could include penalties for failing to maintain a registered agent or not filing an annual report.

• Loss of good standing: Non-payment of fees and taxes can result in the loss of good standing with the state. This can affect the LLC’s ability to enter into contracts, secure financing, and expand its business activities.

• Administrative dissolution: Continued non-compliance can lead to the administrative dissolution of the LLC. Once it’s dissolved, the liability protections afforded by the LLC structure might be lost and members might be exposed to personal liability.

• Tax liens and levies: For major underpayment of taxes, the IRS and state tax authorities can place liens on an LLC’s assets or levy its bank accounts to recover what’s owed.

How to cancel your LLC

Here’s what the process of cancelling your LLC, also known as dissolution, usually looks like.

Vote to dissolve

The LLC’s members must vote to dissolve the company. The operating agreement should outline this process and the majority required for this decision to pass. If there’s no operating agreement, state law provides the dissolution procedure.

Settle outstanding obligations

Pay off all debts, liabilities, and contractual obligations. This includes paying employees their final wages, settling vendor accounts, and resolving any outstanding leases or contracts. File final tax returns and pay any remaining tax liability, which might include federal, state, and local taxes. Some states require a tax clearance before you formally dissolve the LLC.

File articles of dissolution

Once all debts and taxes are settled, file articles of dissolution (sometimes called a certificate of termination or certificate of dissolution) with the state where the LLC was organised. This formally starts the process of legally dissolving the LLC. There might be a fee associated with this filing, depending on the state.

Notify interested parties

Inform all creditors and suppliers of your intent to dissolve. This might be required before you file for dissolution to allow creditors a chance to make claims. Inform clients and customers of your business closure to maintain goodwill and manage any last orders or services.

Close all accounts

Close any business bank accounts and other financial accounts for the LLC. Cancel any business licences or permits to avoid accruing further obligations.

Distribute remaining assets

After all debts and obligations have been paid, distribute the remaining assets among the LLC’s members according to their ownership shares or as stipulated in the operating agreement.