Unless a tax election is filed with the IRS (see more below), an LLC with one member (owner) will be taxed like a sole proprietorship, and an LLC with multiple members will be taxed like a partnership. The majority of Texas LLCs will be taxed under these standard tax classifications. Let's take a deeper look:

1. Sole Proprietorship. This is the default (or standard) for a single-member LLC. You don't have to file anything to get this treatment, it's automatic unless you elect something else.
   
   

   A single-member LLC does not file its own federal return. For this reason, the IRS calls this kind of LLC a "disregarded entity." The LLC is disregarded and all of the LLC's profit are reported by the LLC's sole member on the member's return. If the member is an individual, the member would report profits on a schedule of their personal (IRS Form 1040), just like a sole proprietorship would. The member pays income tax on the profits at their ordinary rate.

   The member would pay self-employment tax (15.3%) on all of that profit. This applies to everything the LLC earns, whether or not you actually took the cash out.

   One thing worth knowing: You can't pay yourself a W-2 salary if the LLC is taxed like a sole proprietorship. Money you take out is a draw, not wages, and it doesn't change what you owe.

2. Partnership. This is the default (or standard) for a multi-member LLC. You don't have to file anything to get this treatment, it's automatic unless you elect something else.
   
   

   A multi-member LLC files a partnership return (Form 1065). The LLC itself doesn't pay federal income tax. Instead, each member gets a Schedule K-1 showing their share of the profit, which they report on their own return. If a member is an individual, they pay income tax on their share at their ordinary rate, the same as a sole proprietor would.

   Each member also owes 15.3% self-employment tax on their share of the profit. This applies to their allocated share whether or not they actually received a distribution.

   Same as with a single-member LLC: members can't be paid a W-2 salary if the LLC is taxed like a partnership. Money a member takes out is a distribution, not wages, and it doesn't change what they owe.

A husband and wife owned LLC is technically a multi-member LLC, but the IRS may allow you to elect to be treated as a single tax unit, similar to a single-member LLC. If you and your spouse (1) are the only two members of your LLC, (2) live in a community property state like Texas, and (3) file taxes jointly, you get a choice. You can follow the standard multi-member rule and be taxed as a partnership, or you can treat the LLC as if it only has one member and file as a disregarded entity on your joint return instead. This is sometimes called a "qualified joint venture" election.

Neither one is required, and neither is automatically better. It comes down to whether you'd rather deal with partnership paperwork (Form 1065 and a K-1 for each of you) or just your joint 1040. Talk to your CPA about which fits your situation.

An LLC can opt out of the standard tax classifications by filing a tax election with the IRS within 75 days after the date on which the LLC is registered (or before the 75th day of a future year). The two optional tax elections are:

1. S-Corp. This one's an election, not a default. To be taxed as an S-Corp, you file Form 2553, within 2 months and 15 days of formation (or the start of the tax year you want it to apply to).
   
   

   Once you've made the election, your LLC files Form 1120-S every year. You're still taxed personally, not the entity. The S-Corp passes its profit through to you on a Schedule K-1, same as a partnership would.

   Here's what's different: since you're taxed as a corporation, you can be a W-2 employee of your own LLC. You pay yourself a reasonable salary for the work you do, and that salary is subject to payroll tax (the equivalent of the 15.3% self-employment tax). Whatever profit is left over after your salary comes out as a distribution, and that part isn't hit with self-employment tax at all.

   That's the whole appeal of the S-Corp election: it splits your profit into wages (taxed) and distributions (not taxed the same way). It only pays off once your profit is comfortably more than what a reasonable salary would be, so this is a number to run with your CPA, not guess at.

   See our full article: Should my LLC be taxed like an S-Corp?

2. C-Corp. This one's also an election. To be taxed as a C-Corp, you file Form 8832. If you want it to apply from day one, you generally need to file within 75 days of formation.
   
   

   Once you've made the election, your LLC files its own return, Form 1120, and pays corporate income tax on its profit. This is different from every other option we've covered: the LLC itself is now a taxpayer, not just a pass-through.

   Here's the catch: if that profit gets paid out to you as a dividend, you pay tax on it again, at your personal rate. That's double taxation, and it's the main reason most small LLCs skip this election. It can make sense if you're reinvesting profit in the business instead of taking it out, since corporate tax rates can run lower than personal rates at certain income levels. But for most real estate investors and small business owners, the S-Corp or default treatment ends up being the better fit. Talk to your CPA before going this route.