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How do the IRS and Alaska tax an LLC

Entrepreneurs who seek to create a limited liability company (LLC) must consider six topics before they start: incorporation, structure, operations, prospects for expansion, taxation, and dissolution. Operating agreements usually address most of these issues. Taxation, however, requires additional compliance with both state and federal agencies.

What are the tax options for an LLC?

Based upon elections made by members of the LLC, the IRS classifies the entity as a partnership, corporation or disregarded entity. The latter describes an LLC with only one member. The partnership designation applies to a domestic LLC with two or more members by default. For tax purposes, partnerships exist as “pass-through” or “flow-through” entities. The profits or losses pass through the entity to the members. Members report their shares on their individual tax returns. An LLC that seeks tax treatment as a corporation must complete Form 8832 issued by the IRS.

What taxes apply to an LLC in Alaska?

Alaska treats LLCs similar to the IRS in one respect. As a flow-through entity, LLCs pay no corporate income tax. One specific tax, a federal self-employment tax, impacts an LLC in Alaska. Members and managers pay this tax to account for Medicare, Social Security, and other benefits. They do not, however, pay any personal income taxes.

Members and managers of an LLC assume different roles and responsibilities once the business has established itself. Tax implications arise later than many other issues, but they remain essential to assess risks for any prospective partner. Attorneys familiar with business formation can assist with these and other issues.