Tax preparation for the different types of business entities in the United States differ from one entity to another. This makes the job of tax preparers a bit more complicated – they would have to adapt to the type of business entity they are working with first before they can actually do the job right.
The tax preparation processes undergone by sole proprietorships, partnerships, and even corporations are very different from those undertaken by LLCs or limited liability companies. If you are finding a hard time adapting to the taxation procedures of limited liability companies, then it is advisable for you to simply continue reading on below.
What are Limited Liability Companies?
A limited liability company or LLC is a special type of legal entity. The business world refers to it as a hybrid entity because it combines some of the best features of the other types of business entities, namely partnerships and corporations.
Just like how corporations work, limited liability companies also provide their owners with liability protection without the burden of double taxation. The profits and losses of the company are passed on to the owners, and such are included in their individual income tax returns.
A limited liability company is very much similar to an S corporation, as you can see on its mentioned benefits. There are, however, more to limited liability companies than just that. Unlike in S corporations, the number of owners allowed in a limited liability company is not limited. In addition to this, all of the owners of the company are allowed to participate in the operations of the business. This is in contrast to limited partnerships, where limited partners are not allowed to have such participation.
How is tax preparation done in an LLC?
Limited liability companies are required to file their tax returns annually. To help you in your job as a tax preparer, here are a few steps that you can follow.
The first thing you must know is the way the limited liability company must be treated. This usually depends on the number of owners of the company. If it is owned by only one person, then the tax of the LLC shall be included in the tax return of that individual. If it is, however, owned by 2 or more people, than the LLC must be treated as either a partnership or a corporation.
The next step that tax preparers would have to do is to fill up the tax forms. Accomplish the income portion of such forms by entering the company’s annual profit – that is, its total revenues less its costs. You must also provide an itemization of such revenues and expenses in the other pages of the tax form.
These deductions usually are those not included in your itemization in the previous step. Make a detailed schedule of these deductions on the deduction page of the tax form.
The taxable income of the LLC is equivalent to its profit derived in step 2 less its deductions in step 3. You would also have considered prepayments made in the prior years, if any.
You will have to sign the forms to show validation on these before mailing them to the proper taxation body.