‘Pass-through taxation’ is the phrase every LLC guide mentions and few actually explain. Here is what it means in practice for a single-member LLC, and the one election worth knowing about once your profits grow.
The Default: Disregarded Entity Treatment
LLCs are pass-through entities, meaning profits pass through to your personal tax return rather than the LLC being taxed separately. For a single-member LLC, this means reporting your LLC income on Schedule C of your personal Form 1040 — there is no separate business tax return in the default setup. Multi-member LLCs file differently, using Form 1065, a partnership return.
Self-Employment Tax Applies Regardless
As an LLC member, you are responsible for self-employment tax on your profits, covering Social Security and Medicare, at approximately 15.3 percent of your net business income. This applies whether you take the money out of the LLC or leave it in the business — profit is taxed as it is earned, not as it is withdrawn.
The S-Corp Election Some Owners Make
Once profits reach a meaningful level, some LLC owners elect to be taxed as an S-Corporation instead, filed via Form 1120-S. This is a tax election layered on top of your existing LLC — you do not have to change your legal structure to make it — and it can reduce self-employment tax exposure for owners with substantial profit, since S-Corp treatment allows part of your income to be paid as a salary and part as a distribution not subject to self-employment tax. Whether it is worth the added payroll administration depends on your specific profit level, and is worth running past an accountant rather than assuming it applies to your situation.
Keeping the Liability Shield Intact Despite Simple Taxes
Simple default taxation does not mean simple record-keeping requirements. An EIN and a separate business bank account are what keep your liability protection intact even though your taxes flow through your personal return — mixing personal and business finances is one of the most common mistakes that undermines an LLC's liability protection, tax treatment aside.
Where to Go From Here
The Complete USA LLC Formation Guide covers bookkeeping basics, the full tax deadline calendar, and the paperwork that keeps your liability shield intact, alongside the complete formation process from Articles of Organization through your first year of compliance.
Get The Complete USA LLC Formation Guide →
📖 Also available on Amazon: Kindle | Paperback
This article is for educational and informational purposes only and does not constitute tax advice. Tax rules and elections are fact-specific — consult a qualified accountant or tax professional for your own situation.