Which Tax Form Do Multi-Member LLCs Use to Report Income?

A Limited Liability Company (LLC) offers a flexible structure under federal tax law, where the number of owners, known as members, is a key factor in how the business reports its finances. For businesses with multiple members, understanding the tax implications is an important part of financial management. The Internal Revenue Service (IRS) provides a default tax status for these entities, but it also allows them to choose alternative classifications if another structure is more advantageous.

The Default Tax Treatment for Multi-Member LLCs

The IRS automatically classifies a domestic LLC with two or more members as a partnership for federal income tax purposes. This default status means the LLC must report its annual financial activities on Form 1065, U.S. Return of Partnership Income. This form details the company’s total income, deductions, gains, and losses for the tax year.

Form 1065 is an informational return, meaning the LLC entity itself does not calculate and pay income tax. Instead, the form reports the business’s financial results and how those results are allocated among its members, placing the responsibility for paying tax on the individual members.

For LLCs that operate on a calendar year, the deadline for filing Form 1065 is March 15. If the business uses a different fiscal year, the return is due by the 15th day of the third month after the end of its tax year. Should the LLC need more time, it can request a six-month extension by filing Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns.

Understanding Pass-Through Taxation and Schedule K-1

The default partnership classification uses a system known as pass-through taxation. In this system, profits or losses are not taxed at the company level but instead “pass through” the business to the members, who are then responsible for paying tax on their share of the net income.

The LLC must prepare and issue a Schedule K-1 (Form 1065) for each of its members annually. This document breaks down each member’s individual share of the LLC’s income, deductions, credits, and other financial items. The allocation of these items is determined by the LLC’s operating agreement, which outlines each member’s ownership percentage.

Members use the figures from their Schedule K-1 to complete their personal income tax returns, such as Form 1040. The income reported is subject to both income tax and self-employment taxes, which cover Social Security and Medicare contributions.

Electing an Alternative Tax Classification

A multi-member LLC can elect a different tax classification instead of the default partnership status. The two primary alternatives are being taxed as a C Corporation or an S Corporation, and these elections change how the company’s income is taxed and which forms are required.

If an LLC elects to be taxed as a C Corporation, it is treated as a separate entity from its owners and files Form 1120, U.S. Corporation Income Tax Return. The corporation pays income tax on its profits at the corporate rate. If the corporation distributes profits to members as dividends, those members must also pay personal income tax on that dividend income, a situation known as double taxation.

Alternatively, an LLC can elect to be taxed as an S Corporation by filing Form 1120-S, U.S. Income Tax Return for an S Corporation. This election preserves the pass-through taxation model, so the company itself generally does not pay income tax. However, S Corporation rules require that members who actively work for the business be paid a reasonable salary, subject to payroll taxes, before other profits are distributed.

How to Change an LLC’s Tax Classification

To change its tax status from the default partnership classification, a multi-member LLC files Form 8832, Entity Classification Election. This form is used to inform the IRS that the LLC is choosing to be taxed as a corporation.

The timing of the Form 8832 filing is flexible, but the effective date of the election is subject to limitations. An election generally cannot take effect more than 75 days prior to the date the form is filed, nor more than 12 months after. Once an election is made, the LLC is generally required to maintain that classification for 60 months before it can change it again.

If the members want the LLC to be taxed as an S Corporation, an additional step is required after electing to be a corporation. The LLC must file Form 2553, Election by a Small Business Corporation, which all members must sign. To be effective for the current tax year, this form must generally be filed no later than two months and 15 days after the beginning of that tax year.