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Do I have to file income taxes if I have a pass-through entity?

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  5. Do I have to file income taxes if I have a pass-through entity?

Before I begin, please understand that L4SB is not a CPA firm, nor has CPA’s on staff. Therefore, you will always be better served by talking to a CPA about these issues.

LLC’s can have four (4) types of tax status, subject to IRS rules and criteria. Those four tax status are:

  • Disregarded. Pass-through. Available to sole-member LLC’s or LLC’s that are only owned by husband and wife. Profits and losses pass through directly to your Schedule C (federal taxes), and appear on your personal taxes. No LLC tax returns are filed.
  • Partnership. Pass-through. Available to multi-member LLC’s. The LLC will issue a K1, and the individual owners report the LLC’s profits and losses on their personal taxes (as apportioned on the K1). There is a tax return to be filed in the state (or states) where the LLC is registered, although it’s typically a “zero-tax return”.
  • Subchapter S. Very similar to Partnership. Pass-through. Available to multi-member or sole member LLC’s. The LLC will issue a K1, and the individual owners report the LLC’s profits and losses on their personal taxes (pro rata). There is a tax return to be filed in the state (or states) where the LLC is registered, although it’s typically a “zero-tax return”.
  • Subchapter C. This is the only tax status that is not pass-through. Available to multi-member and sole member LLC’s. The LLC is taxed as its own entity, and files a federal return as well as state return in whatever state (or states) where the LLC is registered.

Therefore, only under “Subchapter C” does one really care whether a state (i.e. such as DE or WY) has corporate income taxes. With all the other tax status, the company taxes pass-through to the owners, and they pay the company taxes personally on their tax forms. No state income taxes are paid, although you may still need to file a tax form anyway (depending on the tax status and what states you’re registered in).

For Partnership, Subchapter S and Subchapter C, how is it possible you may need to file in multiple states? You will need to file in the state where the LLC is originally formed. However, if your LLC is also registered in other states as a “Foreign LLC,” then you may also be required to file in those states where you are registered as a Foreign LLC. Typically, you will be required to register your LLC in every state where you are “transacting business.”

Need More Information?

Want more detail on what these mean? If so, read our knowledge base article entitled, Tax Status for Companies.

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