For tax purposes, the LLC is treated as a sole proprietorship when there is one owner and as a general partnership when there are two or more owners. Neither the sole proprietorship nor the general partnership is a taxpaying entity. They are termed “pass-through entities,” or conduits. The owners report their share of profit and loss (whether or not it is actually distributed) on their personal income tax returns.
The owner of a one-owner LLC must fill out Schedule C and add it to his or her personal income tax return (Form 1040); members of a multiple-owner LLC must use Schedule E with their returns. A multiple-member LLC also must file a partnership information return, Form 1065, which shows how the money came in and was distributed to members, but no entity-level taxes are imposed. “Salary” to the owner of an LLC is really just a way of dividing profits, or an owner’s withdrawal in a one-owner LLC (see our discussion covering the different ways of dividing profits in the LLC).
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