When two or more people own an LLC, the IRS treats it as a partnership unless it elects otherwise. That one fact drives the whole tax picture: a separate entity-level return, K-1s for every owner, and personal returns that cannot be finished until the K-1s arrive.
What Form 1065 is
The IRS describes Form 1065 as an information return that partnerships file to report income, gains, losses, deductions, and credits. The partnership does not pay tax on its income. Profits and losses pass through to the partners, who include those items on their own returns. The partnership files a copy of each Schedule K-1 with the IRS to report each partner's share.
What a Schedule K-1 shows
- Your share of ordinary business income or loss.
- Guaranteed payments, if any, made to you for services or use of capital.
- Separately stated items such as interest, dividends, capital gains, and Section 179 deductions.
- Credits and other items that keep their character when passed through.
- Your capital account and your share of liabilities.
Taxed on your share, not on what you withdrew
This is the most common point of confusion. You pay tax on your allocated share of profit, whether or not the LLC distributed cash to you. If the LLC earns $100,000 and keeps all of it in the bank, each member is still taxed on their share. Plan for tax payments accordingly. See how much to set aside for business taxes.
Self-employment tax for members
Members who actively work in the business generally owe self-employment tax on their share of ordinary income and on guaranteed payments. Rules differ for passive members and for limited partners in a limited partnership, so the member's role matters. Your preparer should classify each member's income correctly on their K-1.
Basis and why it matters
Each member has a tax basis in their LLC interest, starting with their contribution and adjusted for income, losses, contributions, and distributions. Basis limits how much loss you can deduct and affects whether distributions are taxable. Keeping basis records each year is far easier than reconstructing them later.
Filing deadlines and extensions
Under the Form 1065 instructions, a calendar-year partnership generally files by the 15th day of the third month after year-end, moved to the next business day when it falls on a weekend or holiday. An automatic extension is available by filing Form 7004 by the original due date. Members' personal returns depend on the K-1s, so a late partnership return can delay everyone. Confirm the exact current-year date in the IRS instructions.
Late filing penalties
The IRS charges a penalty for a late or incomplete Form 1065 calculated per partner for each month the return is late, up to a maximum number of months. The dollar amount is adjusted annually, so check the current figure in the instructions. Penalty relief may be available for reasonable cause. See IRS penalty abatement help and what happens if your LLC doesn't file taxes.
What to have ready for your preparer
- 1The operating agreement, especially allocation provisions and any changes during the year.
- 2Reconciled books, a year-end profit and loss, and a balance sheet.
- 3Member contributions, distributions, and loans from or to members.
- 4Guaranteed payments and any health insurance paid for members.
- 5Payroll and 1099 information.
- 6Prior-year return, K-1s, and capital account records.
Changing the default
A multi-member LLC can elect to be taxed as an S corporation or a corporation. That brings payroll, a different return, and different rules. See LLC taxed as S corp. For the preparation side in more depth, read partnership tax return preparation.
Our tax preparation service prepares Form 1065 and member returns together. To schedule a consultation, tell us how many members you have and the states involved.
