Forming a Multi-Member LLC is a great way to protect your business legally and build wealth with partners, but if you’re not careful with how you plan for taxes, it can create friction, unexpected bills, and even IRS issues. As an LLC partner, understanding how your income is taxed is key to avoiding surprises and maximizing deductions.
This blog breaks down how LLC partners are taxed, how to allocate profits properly, and what smart business owners should do before tax season hits.
Multi-Member LLCs Are Taxed Like Partnerships
By default, the IRS taxes Multi-Member LLCs as partnerships. This means:
• The LLC files Form 1065
• Each partner receives a Schedule K-1
• Profits “pass through” to each member’s personal tax return — regardless of
whether the LLC distributed the cash
Tax Tip: Just because you didn’t take a distribution doesn’t mean you won’t owe taxes.
Always plan ahead.
Understand Your Ownership & Allocation Percentages
Profits (and losses) are generally split based on ownership percentage, but they can be
customized in the operating agreement.
Example:
If Partner A owns 60% and Partner B owns 40%, they’ll receive that portion of the profits via
their K-1 — unless the agreement states otherwise.
Tax Tip: Work with a tax pro to ensure your profit allocations match your operating
agreement. Mismatches raise red flags with the IRS.
Self-Employment Tax Applies
LLC members are considered self-employed, so they’re responsible for:
• 15.3% self-employment tax on their share of income
• Making quarterly estimated tax payments
Tax Tip: Consider electing S Corp status for your LLC if you’re making $30,000+ per
member in profit. It could help reduce self-employment tax by thousands.
What to Include in Your Operating Agreement
To avoid tax headaches and partner disputes, make sure your operating agreement
addresses:
• Capital contributions
• Profit and loss allocations
• Distribution policies
• Buy-sell provisions
Legal Reminder: If your LLC doesn’t have a written agreement, your state’s default laws
will apply — which may not protect you.
Watch Out for Guaranteed Payments
If one partner receives a guaranteed payment (like a salary or fixed amount), it must be
reported separately on the tax return and taxed as ordinary income.
Common in LLCs where one partner is more active in the day-to-day operations.
Tax Tip: Guaranteed payments reduce the LLC’s net income, which affects all partners.
Structure them carefully.
Don’t Skip Estimated Taxes
The IRS expects members of a Multi-Member LLC to make quarterly tax payments. Missing
these can lead to penalties and interest.
Quarterly Tax Deadlines:
• April 15
• June 15
• September 15
• January 15 (of the following year)
Should You Elect S Corp Status?
A Multi-Member LLC can file Form 2553 to elect S Corporation status. This allows the
owners to:
• Pay themselves a reasonable salary
• Take remaining profits as distributions
• Save on self-employment tax
Tax Tip: The S Corp structure only makes sense when profits are high enough to justify the
extra admin (payroll, W-2s, etc.).
Work With a Tax Pro — Not Just a Bookkeeper
Tax planning for Multi-Member LLCs isn’t something to wing. If you and your partner want to protect your money, avoid IRS issues, and maximize tax savings — get strategic early.
Need help? Book a call with Taxfully today. We specialize in Multi-Member LLC tax strategies, compliance, and year-round support.
