Tax Reporting of an LLC

By Dale K. Geeslin, CPA, CFE

Limited liability company, or LLC, was first approved in Georgia as a form of business in 1994. Since then there has been a proliferation of LLC’s established in Georgia due mainly to the ease of organization and the flexibility of operations. An LLC can be described as a hybrid between a corporation and a partnership by providing favorable attributes of each. Attorneys will tell you that an LLC provides the liability protection of a corporation. CPA’s will tell you that an LLC gives you flexibility regarding capital investments and distributions as well as ownership options.

Absent an election, the IRS requires qualified LLC’s to file a partnership tax return with the qualification being that there is more than one owner. An LLC owned by one person cannot be a partnership and the IRS does not recognize its existence. However, one owner LLC’s are common and typically allowed by state law. Thus there is an inconsistency between state law and the IRS. When there is one owner, all of the items of income and expense are included on the owner’s personal tax return and the cost of filing a separate business tax return is avoided.

What about an LLC that is owned just by a husband and wife? Now you have to look at state law. The IRS classifies an entity that is solely owned by a husband and wife as community property under state law. As such, the LLC can be deemed to be owned either by one person or by a partnership at the discretion of the married couple. However, if you are not located in a community property state, the jointly owned LLC is not eligible to be a qualified joint venture and the IRS requires that a separate partnership tax return be filed.