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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.

 

 
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