A limited liability company is a hybrid operating structure that combines elements of a corporation and a partnership. The LLC protects assets of its members, an advantage that shareholders enjoy in a corporation, and members record profits or losses on their personal income tax returns, as do partners in a partnership.
The IRS refers to an LLC as a "pass-through" entity. An LLC can have one member or several members, which determines which forms the LLC must file with the IRS. In general, when the LLC suffers a loss, it passes this to members, who must report their share of that loss to the IRS on their individual tax return. In addition, members must make quarterly estimated tax payments to the IRS based on their fractional ownership share in the LLC.
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If the only member of the LLC is an individual, he must report the loss from the LLC on Form 1040, either using Schedule C, E, or F. The IRS treats the one-member LLC as a proprietorship, meaning he must file Schedule C to report the loss. If the LLC is in the real estate business and lost money, it must also file Schedule E. Schedule F is used to report a loss from farming.
A multi-owner LLC must file Form 1065, which is a partnership return. Form 1065 is for informational purposes only. It is used to report income, gains, losses, deductions and credits. The LLC must file Form 1065 by the 15th day of the fourth month following the date the tax year ended as shown on top of Form 1065. For example, if the tax year for a ski resort ends March 31, the LLC must file Form 1065 by July 15.
As a member of a multi-owner LLC, you are allowed to apply your portion of the business losses -- based on your percentage of ownership -- against your taxable income on Form 1040. You can also deduct qualifying business expenses such as travel.