What is a Partnership?
Multi-member LLCs are taxed as partnerships and do not file or pay taxes as the LLC. Instead, the profits and losses are the responsibility of each member; they will pay taxes on their share of the profits and losses by filling out Schedule E (Form 1040) and attaching it to their personal tax return.
How ownership is divided within the LLC should be outlined in your operating agreement. The formal term often used for LLC ownership is "distributive share," also known as an LLC unit. Partners' distributive shares are typically determined in proportion to their initial investment, or based on their level of ongoing involvement with the day-to-day activities of the business.
Distributive Share Example 1
Jonny, Brittany, and Laura want to start a coffee business. They all agree to split their distributive share of profits or losses in thirds since they are equally splitting all the startup costs, daily operations, and so on.
Distributive Share Example 2
Brandon and Savannah want to start a food truck business. Brandon will operate the business on a daily basis and believes his efforts are worth 70% of ownership.
Therefore, when outlining the distributive share, Brandon believes he should be responsible for 70% of profits and losses. Savannah is then responsible for 30% of profits and losses since her involvement is solely administrative and much less time-intensive.
As stated above, a multi-member LLC does not file or pay taxes as the LLC. Instead, the profits or losses will be the responsibility of each co-member in proportion to their distributive share.
Here is a list of the various forms you will need to file:
Income 1040: Individual Income Tax Form. All taxpayers must file this form.
- Schedule E: Partners report their individual share of profit or loss on their personal tax return.
- Schedule SE: This form is for filing and paying your self-employment taxes. The owner of a disregarded entity must pay Medicare and Social Security taxes.
Form 1065: An information form for partnerships to report profits and losses, filed for the partners by the LLC.
- Schedule K-1: A document that details the profits and losses of an individual partner.
The only difference between paying Federal and State income taxes will be the forms you need to file.
Some states like California and Texas require LLCs to pay a special business tax. This tax is usually called a franchise tax, but can also be a "Business Excise Tax" or a "Privilege Tax." This tax can either act as a yearly fee with a flat amount, or it can be a percentage of the business like any other tax.
If you are selling a product or service, you will most likely have to pay sales tax. See our sales tax guide so you can learn everything you need to know about collecting sales and use tax.
For a complete list of business taxes by state, check out our guide.
If you hire employees for your business, you will have to register for your State's employment taxes. These taxes can include things like paying for workers’ compensation and withholding income taxes on behalf of your employees.
Federal Insurance Contributions Act (FICA Tax)
FICA taxes include two types of taxes that are paid by all employers and employees: Social Security tax and Medicare tax. Employers are required to match their employees' FICA tax obligations. The result is that an employer and employee each pay one half of the total FICA tax rate. In addition to FICA taxes, employers are also required to pay unemployment taxes.
Bookkeeping and Accounting
Benefits of Good Accounting
By making sure every possible deduction is monitored and recorded, good accounting can provide some considerable advantages:
- Cuts your tax bill by thousands every year.
- Prevents trouble with the IRS and state governments.
- Provides insight into where your money is going and how to spend it.
- Saves time and frustration.
For more on the common mistakes with small business bookkeeping and accounting, as well as some fixes, visit our guide.