How Are LLCs Taxed in North Carolina?

A Limited Liability Company (LLC) is a business structure that combines the liability protection of a corporation with the operational flexibility of a partnership or sole proprietorship. For business owners, this involves navigating tax obligations at both the federal and state levels to maintain compliance.

Federal Tax Classification of an LLC

The Internal Revenue Service (IRS) does not have a dedicated tax classification for the LLC structure. Instead, the federal government’s default approach to an LLC’s taxation depends on the number of its owners, known as members. An LLC also has the flexibility to choose a different tax status than its default.

An LLC with one member has a default classification as a “disregarded entity,” meaning it is not seen as separate from its owner for income tax purposes. All profits and losses are recorded on the owner’s personal tax return. A multi-member LLC is treated as a partnership by default. The LLC files an informational return, and profits and losses are passed through to the members to report on their individual returns.

An LLC can elect to be taxed differently than its default status as either a C Corporation or an S Corporation. Choosing to be taxed as a corporation means the LLC’s profits may be taxed at the entity level before distributions are made to members. Making this election involves filing specific forms with the IRS. To be taxed as a C Corporation, the LLC must file Form 8832, “Entity Classification Election.” For S Corporation status, the LLC must first elect to be treated as a corporation and then file Form 2553, “Election by a Small Business Corporation.”

North Carolina Income and Franchise Taxes

The method for paying state income tax in North Carolina is directly tied to the LLC’s federal tax classification. For LLCs using their default status as a disregarded entity or a partnership, the business itself does not pay income tax. Instead, income, deductions, and credits are “passed through” to the members, who report their share of the LLC’s profit or loss on their personal North Carolina income tax returns, Form D-400.

If an LLC has elected to be taxed as a C Corporation, it is subject to North Carolina’s corporate income tax. The LLC pays a flat rate of 2.25% on its taxable income. These taxes are reported and paid to the North Carolina Department of Revenue (NCDOR) using Form CD-405, the Corporate Income and Franchise Tax Return.

North Carolina also imposes a franchise tax on LLCs that have elected C Corporation or S Corporation status. This tax is based on the LLC’s net worth, not its profit. For C Corporations, the rate is $1.50 for every $1,000 of the company’s net worth. S Corporations pay $200 for the first $1 million of their tax base and $1.50 for each $1,000 that exceeds that amount. All businesses subject to the franchise tax must pay a minimum of $200, and C Corporations report it on Form CD-405.

North Carolina Sales and Withholding Taxes

LLCs that sell taxable goods or certain services in North Carolina must handle sales and use tax. This requires registering with the NCDOR to get a Certificate of Registration, which authorizes the collection of tax from customers. The LLC must collect the state and local sales tax on its transactions and remit these funds to the NCDOR, usually monthly or quarterly. These payments are filed with a sales and use tax return, such as Form E-500.

An LLC with employees must manage withholding tax by withholding state income tax from employee wages. These funds must be remitted to the NCDOR on a set payment schedule. The LLC must also file periodic withholding reports and an annual reconciliation, Form NC-3. This form summarizes the total compensation paid and state income tax withheld for all employees during the year.

Filing Annual Reports and Paying Taxes

All LLCs organized in North Carolina must file an Annual Report with the Secretary of State to keep company information current. The report confirms details like the LLC’s registered agent and principal office address. Filing can be done online for a $203 fee or by paper for a $200 fee.

The NCDOR provides several methods for paying taxes. Businesses can use the department’s online e-services portal to make payments electronically. Alternatively, payments can be mailed to the NCDOR with a specific payment voucher.

LLCs that anticipate a significant tax liability for the year may need to make estimated tax payments. If the expected tax owed exceeds a certain threshold, the LLC is required to pay its estimated tax in quarterly installments. This system ensures that tax payments are made throughout the year rather than in a single lump sum.