How an LLC Claims Profit & Losses

Corporations are the most utilized legal business structure, but limited liability companies have grown in popularity since the 1990s. LLCs offer many of the benefits that corporations provide -- additional tax deductions and personal liability protection -- but without the stringent administrative oversight requirements. Like all for-profit businesses, LLCs exist to make money for their owners. How an LLC claims its profits or losses depends on the status the LLC elects for tax purposes.

You create an LLC when you file articles of organization with the secretary of state and that filing is accepted. As an owner of an LLC, you are called a member. All states permit multimember LLCs, but not all states permit single-member LLCs. Your LLC is largely a hybrid of a partnership and a corporation. An LLC has perpetual existence and liability shielding similar to a corporation, but its operational and administrative flexibility mimics a partnership.

Your LLC reports its performance on its profit-and-loss, or income, statement. The income statement shows the sales, expenses and resulting profits or losses your company generates during a specific period, often a month or a year. Although the income statement shows your LLC's financial performance, your company "claims" its profits or losses on its tax return.

A single member LLC that does not specifically elect tax treatment as a corporation defaults to disregarded entity status. A disregarded entity is treated as if, for tax purposes, a separate legal entity does not exist. Therefore, your single member LLC is treated as a sole proprietor. As a sole proprietor you must complete Schedule C, D or E as part of your personal tax return, Form 1040. As a single member LLC, you claim profits and losses on one of these schedules.

A multimember LLC defaults to tax treatment as a general partnership. Your LLC must complete Form 1065, partnership tax return and show profits and losses on this return. Multimember LLCs with partnership status must also complete Schedule K, which attributes the LLC’s profits or losses to its members, and provide each member with a copy of Schedule K-1. Members then claim their proportionate share of the LLC's profits and losses on their personal tax returns.

Single member and multiple member LLCs that want to be taxed as corporations must formally file to do so. They must elect tax treatment as a corporation by filing form 8832. LLCs taxed as corporations use Form 1120, corporation tax return, to claim profits and losses. Corporations pay taxes at the corporate level, so LLCs treated as corporations do the same.