Taxes for family- and sibling-owned LLCs

A domestic LLC with at least two members is classified as a partnership for federal tax purposes unless it elects otherwise. The LLC files Form 1065 and issues a Schedule K-1 to each member. Each member reports their share on their own return. Members who work in the business generally pay self-employment tax on their share of earnings.

Partnerships are flexible. The operating agreement can allocate profits differently from ownership, within the tax rules, and members can be other entities or trusts. See partnership tax returns (Form 1065).

An LLC can elect S corporation status by filing Form 2553. It is then treated as a corporation without filing Form 8832. The requirements include:

• Every member consents to the election.
• One class of stock. Differences in voting rights are allowed, but economic rights must be the same, so profits go out in proportion to ownership.
• Eligible owners only: individuals, estates and certain trusts. Partnerships, corporations and nonresident aliens can't be shareholders. The limit is 100 shareholders.
• Reasonable salary: owners who work in the business must be paid reasonable compensation through payroll before taking non-wage distributions.
• Timing: file no more than 2 months and 15 days after the start of the tax year the election takes effect, or any time in the prior year.

Use our S corp election deadline tool or read how to elect S corp status.

Can make sense: steady profits, owners who work in the business and can be paid a reasonable salary, and a family that is comfortable sharing profits strictly by ownership.

Often doesn't: small or uneven profits, some siblings working and others not while you want to split profits unevenly, an owner that is a trust or entity that isn't eligible, or a business in DC. DC treats S corporations as C corporations, so an S corporation doing business in DC files Form D-20 and pays the DC corporation franchise tax. Payroll also adds cost and filings. Compare the two in LLC vs S corp.

• Maryland: pass-through entities file Form 510, or Form 511 when electing the Maryland pass-through entity tax.
• Virginia: pass-through entities file Form 502. The entity can also elect the Virginia pass-through entity tax.
• DC: an LLC taxed as a partnership may owe the unincorporated business franchise tax on Form D-30. An S corporation files Form D-20. See DC business franchise taxes.

Best for: siblings, spouses and multi-generation families who co-own an operating business or real estate LLC.

1. On a free 30-minute call, we learn who owns what, who works in the business and how you want profits shared.
2. We compare partnership and S corporation treatment using your numbers, including payroll and state taxes.
3. We list the questions your operating agreement should answer, such as buyouts, a member leaving and distribution rules. Your attorney drafts it. We don't provide legal advice.
4. If you elect, we prepare Form 2553, set up owner payroll and handle the federal and state returns.

Fees are transparent and fair, quoted upfront, in writing.