An LLC Is a Legal Entity, Not a Tax Classification

The single most common misconception I hear from new business owners is that forming an LLC changes their taxes. It does not — at least, not by default. An LLC is a legal structure created by state law that provides liability protection for owners. For federal tax purposes, the IRS looks through the LLC and taxes the owner based on a separate classification.

This is why two LLCs with identical profits can file completely different returns. The difference comes down to how many members the LLC has and whether the owners have made a tax election with the IRS.

Single-Member LLCs: The Disregarded Entity Default

A single-member LLC is treated as a "disregarded entity" by default. The IRS ignores the LLC for tax purposes and taxes the owner exactly like a sole proprietor. You report business income and expenses on Schedule C, pay 15.3% self-employment tax on net profit, and attach everything to your personal Form 1040.

Consider a single-member LLC earning $90,000 in net profit for 2026:

StepCalculationResult
Net profitLLC income minus expenses$90,000
Apply 92.35% factor$90,000 × 0.9235$83,115
Apply 15.3% SE tax$83,115 × 0.153$12,717

That $12,717 is identical to what a sole proprietor with $90,000 net profit would owe. The LLC gives you liability protection, but the tax math is the same. Run your own numbers through the Self-Employment Tax Calculator.

Multi-Member LLCs: The Partnership Default

A multi-member LLC is taxed as a partnership by default. The LLC itself files Form 1065, a separate partnership tax return due March 15. The LLC issues each member a Schedule K-1 showing their share of profit or loss, and members report that amount on their personal returns.

The LLC pays no federal income tax at the entity level. Profits flow through to members based on the ownership percentages in the operating agreement. Two members splitting profits 60/40 on $200,000 in LLC net profit would receive K-1s for $120,000 and $80,000 respectively — and each pays SE tax on their share.

Each member also pays SE tax on their distributive share. The 60% member with $120,000 on their K-1 owes roughly $16,952 in SE tax ($120,000 × 92.35% × 15.3%), with the Social Security portion capped at the $168,600 wage base for 2026.

Pro Tip: A multi-member LLC operating agreement should specify not just ownership percentages but how profits are distributed, how losses are allocated, and what happens if a member leaves. Without a written operating agreement, state default partnership rules apply — and they rarely match what the members intended.

The Four Tax Elections an LLC Can Make

Beyond the defaults, an LLC can affirmatively elect a different tax classification:

  1. Disregarded entity (default, single-member): Schedule C, sole-proprietor taxation
  2. Partnership (default, multi-member): Form 1065 with K-1s
  3. S-Corporation: File Form 2553, then Form 1120-S — owner takes a reasonable salary plus distributions
  4. C-Corporation: File Form 8832 — entity-level tax at 21%, plus tax on dividends

The S-Corp election is the one most owners care about because it can eliminate SE tax on the distribution portion of profits. Once net profit exceeds roughly $60,000–$80,000, the SE-tax savings often outweigh the added payroll and accounting costs.

IRS Warning: Electing S-Corp status triggers the "reasonable compensation" requirement. The IRS requires owner-employees to pay themselves a market-rate salary subject to payroll taxes before taking distributions. Setting the salary artificially low to dodge payroll tax is a top audit trigger and can result in back taxes, penalties, and interest.

State Filing Obligations on Top of Federal

Beyond the federal return, most states impose their own obligations on LLCs:

  • Annual reports: $50–$320 depending on state
  • Franchise taxes: California charges $800 minimum; Delaware charges $300; Texas charges 0.375% on revenue above ~$1.23 million
  • State income tax: Most states tax LLC profits at the owner level, but a handful impose entity-level taxes

These obligations apply regardless of whether the LLC turned a profit. A multi-member LLC that files Form 1065 late faces a $245-per-member-per-month penalty on the federal side, on top of any state penalties.

The Bottom Line

An LLC is a legal shield first and a tax choice second. By default, a single-member LLC files as a sole proprietor on Schedule C and a multi-member LLC files Form 1065 as a partnership — both paying 15.3% SE tax on net profit. The tax picture only changes if you affirmatively elect S-Corp or C-Corp status. Track every deduction with the Tax Deduction Finder, model your SE tax with the Self-Employment Tax Calculator, and revisit your tax classification once profit crosses the $60,000–$80,000 threshold where an S-Corp election starts to pay.