Simple Overview of LLC Pass Through Taxation

You’re trying to relate two topics that are unrelated. Paying quarterly taxes has nothing to do with the tax structure of your LLC.

I understand that an LLC filed as a Partnership to use Pass Through taxation is not required to pay quarterly taxes.

If the LLC is taxed as a partnership, technically it doesn’t pay quarterly taxes, but it’s important to understand that you, as the owner, are required to pay quarterly taxes. Check out this other question for a little bit more information on quarterly taxes. Also read IRS Publication 505 Tax Withholding and Estimated Tax to learn more about quarterly taxes.

In this scenario, the owners pay taxes on the dividends received.

This is incorrect. As the owner of a pass-through LLC, you can obtain money from the LLC in two main ways: 1) salary or 2) distribution. But for tax purposes the dollar amount that the LLC pays you (either through salary or distribution) is irrelevant. You will have to pay taxes on the entire profit generated by the LLC, whether or not it is actually distributed to you.

But how does this work in reality?

For example, at the end of the year when all the LLC’s income and expenses are added up, you end up with a surplus (profit) of $1000. You and your partner decide to withdraw $100 each from the LLC. That leaves $800 in the LLC. Assuming you each own 50%, each of you will report $500 in income (50% * $1000). In a pass-through tax status, the IRS doesn’t care that you left $400 in the LLC, you’ll still have to pay any taxes due on that amount.

Does the LLC provide a 1099-MISC?

No. The LLC will file Form 1065 (Schedule K-1) with the IRS and provide all partners a copy. The partners will use Form 1065 to complete their individual tax returns.

Here are some additional IRS resources that’ll help you sort this out:

• Partnerships
• Taxation of Limited Liability Companies

Here is what happens on each of the events you state above

I form a new LLC today

No tax consequences. You merely have to pay the filing fee associated with forming the LLC.

I infuse the company with $500

You may owe tax unless you do a certain transaction in which you take back a membership interest with the same basis as the cash you put in. This is what most founders do without even realizing it.

I do some work, and invoice a client for $250

No tax yet, but since it is a "pass through" entity, this automatically gets attributed to you personally regardless of whether or not you take the money out of your bank account. Therefore, you must pay personal income tax on it at the end of the year.

I write a check from the company account for each of 2 partners for $100 each.

If the owners also own a percentage of the LLC (i.e. they are LLC members) then actual payment of the $100 is not necessary for them to be taxed on their pro-rata earnings.

For example, say there are three founders that each hold 33.3% each. The LLC makes $300 and the year closes. Even if the LLC keeps the money in its bank account, each of the founders will be taxed on the $100 as if they had taken the money out. This is the nature of how "pass through" taxation works for tax reporting. You pay tax on it regardless of whether or not you take the money out.

The year ends. In this scenario, how do the owners report the $100 income on their personal income taxes

The LLC will have to file a form 1065 with the IRS by April 15th of the next year, and fill out a "K-1" for each of the founders, which they will use to report on their personal income tax return, or 1040s.

Does the LLC provide a 1099-MISC?

No, they provide a K-1 instead.

You don't have to get into payroll taxes unless you select what's called a "manager-managed" LLC and select officers of the LLC like a CEO, CFO, etc... When you do this, then you have to file quarterly payroll tax returns form 941.

If you want more simplified tax reporting, select a member-managed LLC and you don't have to file form 941.

Note: This is not legal advice, and does not create an attorney-client relationship.

What you said isn't exactly right.

An LLC isn't recognized as a taxable entity by the IRS. What that means is that revenues (and expenses) flow onto the owner's personal tax returns.

Those revenues and expenses are mixed with your other personal activity, and you just pay taxes the normal way.

But it's incorrect to just say "I don't have to pay quarterly." You DO have to pay all income tax quarterly (or more often, e.g. in typical W2 withholding you're paying income tax every paycheck).

You need to talk to an accountant in your area about local taxes, state taxes, and whether with your total personal finances, how and when you need to pay taxes.