LLC
Learning Center
What is an
LLC?
Limited liability companies (“LLCs”)
are a creation of state law.
An LLC is somewhat of a hybrid entity in that it can
be structured to resemble a corporation for owner liability
purposes and a partnership for federal income tax purposes.
An LLC offers the limited liability the benefit of
a corporation and the single level of taxation of a partnership.
The owners, not the entity, are then responsible for
the payment of the tax, if any.
LLCs are owned by investors known as
members. The company is typically managed by a designated
member or group of members.
Like shareholders of a corporation, the members' liability
is limited to the amount of their investment. For tax purposes,
LLCs with more than one owner are
treated as partnerships, and LLCs with one owner are disregarded. In both cases, the LLC income is taxed to the
owner directly without any entity level tax.
The Benefits of Forming an
LLC - Why are LLCs so Popular?
- Easy
and inexpensive to form
- Recognized
by all states
- Limited
liability for all members.
- One
level of tax for federal income tax and state income tax
purposes (in most cases).
- Pass
through of business losses to the member or members.
- Can
utilize a corporate management structure.
- Can
have one member or multiple members.
- Flexibility
in distributing cash to the members
- Flexibility
in allocating profits/losses to the members
- Flexibility
in conducting business affairs.
- Can
exist indefinitely.
Federal and State Tax Treatment
of LLCs
LLCs are not taxed on any income it earns
or generates. Instead,
all taxable revenues and expenses are passed through to the
owners of the entity who would then be responsible for the
payment of tax on those revenues or expenses.
For tax purposes,
a single member LLC is treated as a sole proprietorship, and
a multi-member LLC is treated as a partnership.
The LLC itself does not ordinarily pay federal income taxes
on its own behalf as a separate entity.
However, an LLC is required to file an annual informational
tax return with the Internal Revenue Service Most LLCs
will qualify for state income tax pass-through treatment.
State Tax Chart
| STATE |
FRANCHISE OR ENTITY-LEVEL
TAX |
| Alabama |
Alabama does not require partnerships, LLCs
taxable as partnerships, or disregarded single-member
LLCs to pay a tax based on
net income.
|
| Alaska |
Alaska does not require partnerships, LLCs
taxable as partnerships, or disregarded single-member
LLCs to pay a general net
worth tax or a tax based on net income. However, Alaska imposes a $100 per year tax
on domestic LLCs and $200
per year tax on foreign LLCs. |
| Arizona |
Arizona does not require partnerships, LLCs
taxable as partnerships, or disregarded single-member
LLCs to pay a general net
worth tax or a tax based on net income. |
| Arkansas |
Arkansas does not require partnerships, LLCs
taxable as partnerships, or disregarded single-member
LLCs to pay a general net
worth tax or a tax based on net income. However, Arkansas requires LLCs to pay an annual privilege tax to the secretary of
state, regardless of the LLC’s
income tax classification.
LLCs pay only a $150
minimum tax. |
| California |
California follows the federal tax treatment of partnerships, and
partnerships are not subject to tax on their income.
LLCs taxed as partnerships are not subject
to franchise or income tax in California. Like limited partnerships, LLCs, including single-member LLCs
disregarded for federal income tax purposes, are subject
to the minimum franchise fee of $800.
In addition to the minimum franchise fee, LLCs
are subject to a gross receipts based annual fee, regardless
of their federal entity classification.
The gross receipts based fee is based on a graduated
scale and ranges from $900 for LLCs with receipts from California between $250,000 and
$500,000 to $11,790 for LLCs
with California receipts in excess of $5 million. |
| Colorado |
Colorado does not require partnerships, LLCs
taxable as partnerships, or disregarded single-member
LLCs to pay a general net
worth tax or a tax based on net income. |
| Connecticut |
Connecticut does not require partnerships, LLCs
taxable as partnerships, or disregarded single-member
LLCs to pay a general net
worth tax or a tax based on net income. However, Connecticut requires limited partnerships,
LLCs taxable as partnerships,
and disregarded single-member LLCs
that file a report with the Secretary of State to pay
the state Department of Revenue an annual $250 business
entity tax. |
| Delaware |
Delaware does not require partnerships, LLCs
taxable as partnerships, or disregarded single-member
LLCs to pay a general net
worth tax or a tax based on net income. |
| D.C. |
The District of Columbia imposes an unincorporated business franchise
tax on partnerships and LLCs
that are taxable as partnerships for federal income
tax purposes. Partnerships that engage in trade or business
in the District or receive income from sources within
the District have gross income of more than $12,000
are subject to the tax. The minimum tax is $100.
In addition, the District of Columbia imposes an annual “ballpark
fee” on partnerships and LLCs,
regardless of their federal entity classification.
The fee is triggered if the taxpayer has District
of Columbia gross receipts of $5 million or greater
in its most recent calendar
or fiscal year ending before June 15. The fee is graduated according to the fee
payor’s District of Columbia gross receipts, ranging from
$5,000, for a fee payor with
$5 million of gross receipts, to a maximum of $16,500,
for a fee payor with gross
receipts in excess of $16 million. |
| Florida |
Florida does not require partnerships, LLCs
taxable as partnerships, or disregarded single-member
LLCs to pay a general net
worth tax or a tax based on net income. However, Florida requires partnerships and
LLCs doing business, or authorized to do business in the
state, to pay an annual personal property intangibles
tax, regardless of their federal income tax classification.
A tax rate of 0.05 percent is applied against
the value of intangibles having a taxable situs
in the state. Partnerships are not required to pay the tax
in any year when the aggregate tax liability, after
exemptions and before application of an early filing
discount, would be less than $60. |
| Georgia |
Georgia does not require partnerships, LLCs
taxable as partnerships, or disregarded single-member
LLCs to pay a general net
worth tax or a tax based on net income. |
| Hawaii |
Hawaii does not require partnerships, LLCs
taxable as partnerships, or disregarded single-member
LLCs to pay a general net
worth tax or a tax based on net income. |
| Idaho |
Idaho does not require partnerships, LLCs
taxable as partnerships, or disregarded single-member
LLCs to pay a general net
worth tax or a tax based on net income. |
| Illinois |
Illinois imposes its personal property tax replacement income tax
on partnerships and LLCs taxable
as partnerships. The
tax is equal to 1.5 percent of the partnerships net
income for the taxable year. Illinois does not impose its personal property
tax replacement tax on LLCs
that are disregarded for federal income tax purposes.
Neither a partnership nor an LLC is subject to
Illinois franchise tax. |
| Indiana |
Indiana does not require partnerships, LLCs
taxable as partnerships, or disregarded single-member
LLCs to pay a general net
worth tax or a tax based on net income. |
| Iowa |
Iowa does not require partnerships, LLCs
taxable as partnerships, or disregarded single-member
LLCs to pay a general net
worth tax or a tax based on net income. |
| Kansas |
Kansas does not require partnerships, LLCs
taxable as partnerships, or disregarded single-member
LLCs to pay a tax based on
net income. However,
a limited partnership, limited liability partnership
(LLP), or LLC (including a single-member LLC that is
disregarded for federal income tax purposes) with net
capital accounts located or used in Kansas at the end
of the preceding taxable year of $100,000 or more is
subject to an annual franchise tax at the rate of 0.125
percent of the net capital accounts located or used
in Kansas.
Limited partnerships and LLCs also must
remit to the secretary of state a $55 annual franchise
fee. |
| Kentucky |
For tax years beginning on or after January 1, 2005, limited partnerships,
LLPs, and LLCs
doing business in Kentucky are subject to the corporation
income tax. The top corporate tax rate is 6% on all amounts
over $100,000 for tax years beginning on or after January
1, 2007. |
| Louisiana |
Louisiana does not require partnerships, LLCs
taxable as partnerships, or disregarded single-member
LLCs to pay a general net
worth tax or a tax based on net income. |
| Maine |
Apart from certain financial institutions, Maine does not impose
an income tax on partnerships, LLCs
taxable as partnerships, or disregarded single-member
LLCs. |
| Maryland |
Maryland does not require partnerships, LLCs
taxable as partnerships, or disregarded single-member
LLCs to pay a general net
worth tax or a tax based on net income. However, Maryland imposes a tax on a partnership
or LLC taxable as a partnership to the extent that it
has a partner that is a nonresident of Maryland (or
a non resident entity), and the partnership has nonresident
taxable income for the taxable year. Thus, Maryland’s “entity-level tax” is, de
facto, a tax imposed on the entity’s nonresident owners
that is paid on their behalf by the partnership (i.e.,
it is a withholding tax rather than a pure entity-level
tax.). |
| Massachusetts |
Massachusetts generally does not require partnerships, LLCs taxable as partnerships, or disregarded single-member
LLCs to pay a general net
worth tax or a tax based on net income.
However, an LLC that is disregarded for federal
income tax purposes and that has an S corporation as
its sole member will be separately taxed by Massachusetts
as an S corporation. |
| Michigan |
Michigan imposes its single business tax (SBT) on partnerships
and LLCs taxable as partnerships
having business activity in the state.
A single-member LLC classified as a disregarded
entity for federal income tax purposes is not separately
subject tot tax (i.e., only the single member is subject
to tax.).
The SBT is based on the value added to goods and services by the
taxpayer. It
is essentially based on the gross receipts rather than
income. The tax
rate is 1.9% of the adjusted tax base. The first $45,000 of the tax base is exempt.
|
| Minnesota |
Minnesota generally does not impose its income tax on partnerships,
LLCs taxable as partnerships,
or disregarded single-member LLCs. In addition, Minnesota imposes a minimum fee
on each treated as a partnership that is required to
file a return with the state (other than a partnership
that derives over 80 percent of its income from farming).
The fee imposed on a partnership is a maximum
of $5,000, and is based on the sum of the partnership’s
Minnesota property, payroll, and sales or receipts. |
| Mississippi |
Mississippi does not require partnerships, LLCs
taxable as partnerships, or disregarded single-member
LLCs to pay a general net
worth tax or a tax based on net income. |
| Missouri |
Missouri does not require partnerships, LLCs
taxable as partnerships, or disregarded single-member
LLCs to pay a general net
worth tax based on net income. |
| Montana |
Montana does not require partnerships, LLCs
taxable as partnerships, or disregarded single-member
LLCs to pay a general net
worth tax based on net income. |
| Nebraska |
Nebraska does not require partnerships, LLCs
taxable as partnerships, or disregarded single-member
LLCs to pay a general net
worth tax based on net income. |
| Nevada |
Nevada does not require partnerships, LLCs
taxable as partnerships, or disregarded single-member
LLCs to pay a general net
worth tax based on net income. |
| New Hampshire |
Partnerships and LLCs, regardless of
their federal entity classification, are included in
the definition of “business organizations” that are
subject to the New Hampshire business profits tax (BPT).
The amount of the tax is determined by multiplying
the “taxable enterprise base value” by 0.75 percent.
The taxable enterprise base value is the sum
of all compensation paid or accrued, interest paid or
accrued, and dividends paid by the business enterprise,
adjusted for special deductions and apportionment.
|
| New Jersey |
Partnerships and LLCs treated as partnerships
with two or more owners are subject to a New Jersey
filing fee of $150 per owner, up to a maximum of $250,000. Partnerships that are investment clubs and
partnerships with no New Jersey source income are not
subject to the filing fee. |
| New Mexico |
New Mexico does not require partnerships, LLCs
taxable as partnerships, or disregarded single-member
LLCs to pay a general net
worth tax based on net income. |
| New York |
New York: For tax years before 2003 and after 2006, every LLP,
LLC treated as a partnership, and disregarded single-member
LLC with New York-source income is subject to an annual
filing fee of $50 for each partner or member as of the
last day of the taxable year. The minimum fee is $325 and the maximum fee
is $10,000.
New York City: Partnerships and LLCs
treated as partnerships are subject to the New York
City unincorporated business tax (UBT).
The tax is imposed at the rate of 4 percent on
the apportioned unincorporated business income of the
entity. |
| North Carolina |
North Carolina does not require partnerships, LLCs taxable as partnerships, or disregarded single-member
LLCs to pay a general net
worth tax based on net income. |
| North Dakota |
North Dakota does not require partnerships, LLCs
taxable as partnerships, or disregarded single-member
LLCs to pay a general net
worth tax based on net income |
| Ohio |
In general, partnerships and LLCs treated
as partnerships are not subject to the Ohio franchise
tax. However, a pass-through entity with at least
one qualifying investor that is not an individual is
subject to an entity-level tax that is similar to a
withholding tax.
Effective July 1, 2005, Ohio requires business entitles, including
partnerships, LLCs taxable
as partnerships, and disregarded single-member LLCs,
with taxable gross receipts of $150,000 or more in a
calendar year, to pay a commercial activity tax (CAT),
measured by gross receipts, for the privilege of doing
business in the state.
The business entity must pay $150 for gross receipts
between $150,000 to $1 million.
The rate is phased in over the next five years
in 20 percent increments and is subject to adjustment
by the Ohio Tax Commission if revenue collections of
the tax are 10 percent or more greater
or lesser than projections. |
| Oklahoma |
Oklahoma does not require partnerships, LLCs
taxable as partnerships, or disregarded single-member
LLCs to pay a general net
worth tax based on net income. |
| Oregon |
Oregon does not require partnerships, LLCs
taxable as partnerships, or disregarded single-member
LLCs to pay a general net
worth tax based on net income. |
| Pennsylvania |
Pennsylvania does not impose its corporate net income tax on partnerships,
LLCs taxable as partnerships,
or disregarded single-member LLCs. In addition, partnerships are not subject
to the capital stock/franchise tax.
Capital stock and franchise tax imposed on all
LLCs except for restricted
professional companies.
The capital stock tax is being phased out, with
the rates set as follows: 5.99 mills for 2005; 4.99
mills for 2006; 3.99 mills for 2007; 2.99 mills for
2008; 1.99 mills for 2009; and .99 mills for 2010. |
| Rhode Island |
Rhode Island does not require partnerships, LLCs
taxable as partnerships, or disregarded single-member
LLCs to pay a general net
worth tax based on net income. |
| South Carolina |
South Carolina does not require partnerships, LLCs taxable as partnerships, or disregarded single-member
LLCs to pay a general net
worth tax based on net income. |
| South Dakota |
South Dakota does not require partnerships, LLCs
taxable as partnerships, or disregarded single-member
LLCs to pay a general net
worth tax based on net income. |
| Tennessee |
Limited partnerships and LLCs taxable
as partnerships are subject to the franchise and excise
taxes in Tennessee.
Neither a general partnership nor a single-member
LLC whose sole member is a corporation is subject to
the tax. The
franchise tax is imposed at the rate of 25 cents per
$100 or major fraction thereof, of a taxpayer’s net
worth. Net worth
is defined as the difference between a taxpayer’s total
assets and total liabilities.
An excise tax of 6% is imposed on the net earnings
from business done in Tennessee. Tennessee imposes an annual fee of $50 per
member of the LLC. Tennessee
also requires all partnerships and LLCs
to pay an annual 6 percent tax on stock dividends and
bond interest received. |
| Texas |
Texas does not require partnerships to pay a general net worth
tax or a tax based on net income.
However, LLCs are subject
to the Texas franchise tax regardless of their classification
for federal income tax purposes.
The tax is composed of two components: a capital
component and an eared surplus component. The franchise tax is based on the greater
of .25% of net taxable capital or 4.5% of net taxable
earned surplus. |
| Utah |
Utah does not require partnerships, LLCs
taxable as partnerships, or disregarded single-member
LLCs to pay a general net
worth tax based on net income. |
| Vermont |
Vermont does not require partnerships, LLCs
taxable as partnerships, or disregarded single-member
LLCs to pay a general net
worth tax based on net income. However, a minimum tax of $250 is imposed
on partnerships and LLCs electing
partnership treatment. |
| Virginia |
Virginia does not require partnerships, LLCs
taxable as partnerships, or disregarded single-member
LLCs to pay a general net
worth tax based on net income. |
| Washington |
Washington imposes its business and occupation tax on all entities
doing business in the state, including partnerships
and LLCs, regardless of their federal entity classification.
Depending on the type of business conducted by
the taxpayer, the tax base is one of the following:
the value of products, gross proceeds of sales, or gross
income of the business.
The rate varies from 0.138 percent to 1.5 percent. |
| West Virginia |
West Virginia does not require partnerships, LLCs
taxable as partnerships, or disregarded single-member
LLCs to pay a general net
worth tax based on net income. However, partnerships and LLCs, regardless of entity classification, are subject to
franchise tax in West Virginia.
The tax rate is 0.7 percent or $50, whichever
is greater. |
| Wisconsin |
Wisconsin does not require partnerships, LLCs
taxable as partnerships, or disregarded single-member
LLCs to pay a general net
worth tax based on net income. However, Wisconsin requires partnerships,
and LLCs electing partnership
treatment, that have at least $4 million in gross receipts
from all activities for the taxable year, to pay a recycling
surcharge, computed as a percentage of net income.
A disregarded single-member LLC is not subject
to the recycling surcharge. |
|
Wyoming |
Wyoming does not require partnerships, LLCs
taxable as partnerships, or disregarded single-member
LLCs to pay a general net
worth tax based on net income. However, Wyoming requires LLC to file with
the secretary or state an annual franchise tax or a
license tax. The tax is based on the corporate property
and assets located and employed in the state in an amount
of $50 or two-tenths of one mill on the dollar ($.0002),
whichever is greater. |
|
