Your LLC’s tax classification affects how you file federal income tax for your business. Contact a tax lawyer or a qualified accountant for help deciding which tax system works best for your business.
The unified tax audit rules (facilitated by the IRS) automatically apply to any business entity that is taxed as a partnership. These rules do not apply to single-member LLCs or to those that elect to be taxed as corporations.
Generally, an LLC that has at least two members is treated as a partnership for tax purposes. In this case, the business does not pay income tax but does pay employment and excise taxes. Each partner reports their earnings from the LLC on their personal tax return.
A single-member LLC is treated as a disregarded entity (also known as a sole proprietorship). In this case, the owner reports the company’s income and expenses on their personal tax return. However, a single-member LLC can elect to be taxed as a corporation instead.
A corporation gets taxed at the company level, and each member is responsible for paying income tax on any distributions. In effect, this creates two levels of taxation (i.e., a double tax).