The limited liability company is the most popular entity for small US businesses. It shields owners from business debts and, by default, avoids corporate income tax entirely. Profit flows through to the owners, who pay tax on their personal returns.
Default tax classification
| Members | Default IRS treatment | Federal return |
|---|---|---|
| One | Disregarded entity (taxed like a sole proprietor) | Schedule C on Form 1040 |
| Two or more | Partnership | Form 1065, K-1s to members |
| Any | Can elect C corp (Form 8832) or S corp (Form 2553) | Form 1120 or 1120-S |
The LLC itself is a state-law creation. The IRS doesn't have an "LLC tax"; it taxes the LLC as one of the entities above.
The taxes an LLC owner pays
- Federal income tax on their share of profit at personal rates from 10% to 37% (2026 single brackets run to $640,600 before the 37% rate applies).
- Self-employment tax of 15.3% (12.4% Social Security up to the wage base plus 2.9% Medicare) on net earnings, plus 0.9% Additional Medicare Tax above $200,000.
- State income tax where the business operates, from 0% in states like Texas and Florida to 13.3% in California.
- State LLC fees and franchise taxes, such as California's $800 annual minimum or Tennessee's franchise and excise taxes, which apply to LLCs.
The 20% QBI deduction
Section 199A lets pass-through owners deduct up to 20% of qualified business income. The One Big Beautiful Bill Act made it permanent and expanded the phase-in ranges to $75,000 (single) and $150,000 (joint) above the thresholds. Specified service trades or businesses (health, law, accounting, consulting, financial services) lose the deduction above those ranges, and for other businesses it can be limited by W-2 wages paid and property owned.
The S corp election
An LLC taxed as an S corporation splits the owner's income into salary (subject to payroll tax) and distributions (not subject to payroll tax).
| Profit $150,000 | Default LLC | LLC taxed as S corp |
|---|---|---|
| Owner salary | n/a | $70,000 |
| Payroll / SE tax | ~$21,000 | ~$10,700 |
| Distribution | $150,000 profit | ~$74,600 (after employer payroll tax) |
| Approximate payroll tax saving | ~$10,000 |
Costs to weigh: payroll software, a separate 1120-S return, state fees (some states tax S corps, for example California's 1.5% franchise tax with an $800 minimum), and IRS scrutiny of "reasonable compensation."
Pass-through entity tax (PTET) elections
The federal SALT deduction cap for individuals was raised to $40,000 for 2025 through 2029, phasing down for incomes above $500,000. Over 35 states let LLCs and S corps pay state income tax at the entity level, where it remains fully deductible federally. For high earners in high-tax states, a PTET election is often worth thousands.
When an LLC is the wrong choice
- Raising venture capital: VCs invest in C corporations. See Corporation taxes.
- QSBS planning: Only C corporation stock qualifies for the Section 1202 exclusion.
- Retaining large profits: If you plan to reinvest most profit, the 21% corporate rate may beat 37% personal rates.
State LLC formation and annual costs
Costs vary widely. Our state guides list the filing fee, annual report fee and franchise tax for all 50 states. A few examples:
| State | Formation fee | Annual cost |
|---|---|---|
| Delaware | $110 | $400 annual tax (raised from $300 for 2026) |
| Wyoming | $100 | $60 minimum annual report |
| California | $70 | $800 minimum franchise tax + $20 statement every two years |
| Texas | $300 | No franchise tax due below the threshold, but report filing required |
| Massachusetts | $500 | $500 annual report |
Outside the US
Most countries have a limited-liability equivalent, but almost none get pass-through treatment by default. A UK Ltd, German GmbH or Dutch BV pays corporate tax at the entity level. See Corporate Tax 101 and our country calculators.
Frequently Asked Questions
How is a single-member LLC taxed?
By default the IRS treats a single-member LLC as a disregarded entity. Profit is reported on Schedule C of the owner's Form 1040 and is subject to income tax and 15.3% self-employment tax on net earnings up to the Social Security wage base.
When does an S corp election make sense for an LLC?
Once net profit is high enough that payroll tax savings on distributions exceed the extra cost of running payroll and filing Form 1120-S, often around $80,000 to $100,000 of profit. The owner must pay a reasonable salary first.
Do LLC owners get the 20% QBI deduction?
Usually yes. The Section 199A qualified business income deduction lets eligible pass-through owners deduct up to 20% of qualified business income. The One Big Beautiful Bill Act made it permanent from 2026 and widened the phase-in range. Specified service businesses such as law and consulting lose the deduction above income thresholds.
Which state is cheapest for forming an LLC?
Filing fees range from about $35 in Montana to $500 in Massachusetts. Ongoing costs matter more: California charges an $800 minimum franchise tax every year, while states like Arizona and Ohio have no annual report fee. Most small businesses should form in the state where they operate.