Taxation of a limited liability company
A limited liability company is a pass-through object, which indicates a situation in which profit passes through to investors or purchasers who then pay taxes. In this regard, the firm itself is not taxed. Instead, the company's income is taxable; the revenue is moved through to all partners or members in accordance with their purchase interest despite whether the partner received a distribution in reality (Moll, 2010). The identical situation can be applied to losses that each of the members can decrease their portion of losses from their tax return. An LLC has to register a tax return notwithstanding of not having a tax burden commonly referred to as a schedule k-1. This allows each member to report his or her share of tax liability when it was earned or incurred by the Limited Liability Company this helps avoid double taxation that happens in other corporations where income is taxed at the corporate level and then taxed again when it is being distributed as dividends to its various members.
The process of taxation begins with the IRS assuming that a Limited Liability Company with more than one member is a partnership for tax purposes (Moll, 2010). At tax time, the limited liability company files form 1065, a partnership return of income which must be attached with a schedule k-1 for each member; that reports each members share of Limited Liability Company income, tax credit items and deductions; which are then included on the members personal tax return.
In conclusion, Limited Liability Company protects its members from double taxation by the flexibility of its nature. The state tax body IRS considers a limited liability company as a no tax burden as it follows a pass through tax system. Hence, taxation is only carried out once at the personal taxes of the members.
Reference
Moll, D. K. (2010). Minority Oppression & the Limited Liability Company: Learning (or Not) from Close Corporation History.
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