There are many misconceptions relating to limited liability companies and how they are taxed. This is, in part, due to the flexibility LLCs have when selecting their form of taxation. It is also because providers in other states are promising things they cannot deliver.
For example, many consider forming a Nevada or a Wyoming LLC because those states offer no income taxes. However, a majority of clients will never see this benefit because LLCs are usually taxed as pass through entities. This is something the other incorporation providers dont tell you while they are busy trying to sell you.
Pass through taxation is when the company's earnings flow directly onto your personal income statement. In short, this means you record the company's earnings as if they are your own. If you live in Ohio, this means you pay Ohio's personal tax rate. If you live in Georgia or Washington, then you pay their respective taxes. For this reason, it doesn't matter where you create your company. What matters, for taxes, is where you live.
This means limited liability companies avoid the dreaded "double taxation" that corporations experience.
Pass through taxation is the default classification for limited liability companies. If you are a single-member LLC, then your company will be considered a disregarded entity. If you have multiple-members, then the company will be taxed as a partnership. In a partnership, the company will issue a K-1 report to the IRS with the owners in turn reporting that income on their personal statement's. The K-1 is required to ensure the owner's stay honest about their share of earnings. The company does not pay any taxes itself.
There is also the option of electing for Subchapter-S, or S-Corp, taxation for an LLC. This is just another form of pass through taxation and is not inherently better than being a disregarded entity or partnership. Your accountant can tell you which is better for your situation and the answer may change year to year.
The Internal Revenue Service assigns you a default classification when you apply for your Employer Identification Number. If you want to change it, then you must submit either form 2553 for S-Corp taxation or form 8832 for everything else. We can assist you with filing these forms if needed.
You have 75 days after obtaining your EIN for submit the above forms and have them be retroactive. After that period, you may change your classification once every five years and the change will not be retroactive.