A limited liability company in general does not have to pay any business taxes. When we talk about the classification of LLC taxes in North Dakota, we know that it is a pass-through taxation structure. Typically, the profit LLC makes passes through the LLC to its members. Based on the profit share, members file their income tax returns. LLCs, unlike other corporations, do not have to pay income taxes based on profit or revenue.
IRS (Internal Revenue Service) allows LLCs to choose their preferable classification of tax at the beginning of the LLC formation. In general, a single-member LLC is taxed as a sole proprietor and a multi-member LLC is taxed as a partnership. As there is no fixed tax structure for LLCs, anyone certainly wants to opt for the most beneficial one. Keep reading till the end to know more about the tax structure of a North Dakota LLC and related aspects.
On this page, you’ll learn about the following:
- Classification of North Dakota LLC Taxes
- LLC Taxes to be Paid in North Dakota
- Default LLC Tax Classification Rules
- Options to Change Default Tax Classification
- Choosing a Classification for Your LLC
- Classification of LLC Taxes – At a Glance
Classification of North Dakota LLC Taxes
An LLC is considered a Pass-through Entity because it allows the income to pass through & become self-employment income. The members of the LLC have to pay Self-employment tax or Self-Employment Taxes on any income they earn through the LLC. The LLC has to pay Franchise Tax on its income. In addition to the Self-employment tax, there are some other requirements that an LLC has to consider, such as:
- Franchise Tax – Franchise tax applies to or levies upon LLCs, C-corporations, & S-corporations. Sole Proprietorship & Partnerships (directly owned by individuals) are exempted from the Franchise Tax. This tax is to be paid with the office of the Comptroller of Public Accounts.
- Federal Tax Identification Number – An LLC with employees must obtain a Federal Tax Identification Number. North Dakota does not have a separate State Tax Identification number.
- State Employer Taxes – If an LLC has employees on the payroll, it must pay state employer taxes in North Dakota. These taxes are handled through North Dakota Workforce Commission.
- Franchise Tax Report – In North Dakota, the LLCs do not file a Franchise Tax Report. They need to file an Annual Report with the Secretary of State.
Federal Tax Classifications
When LLCs were recognized as one of the types of Business Corporations, IRS did not create a new tax classification just for the LLC. LLCs were allowed to choose from the current tax classifications.
LLC Taxes to be Paid in North Dakota
Though LLCs do not have to pay any business taxes other than some state taxes, the members are required to pay individual income tax and other federal taxes. Here are some taxes to be paid while having an LLC in North Dakota,
State Income Tax
In North Dakota, LLC members have to pay the state income tax. Depending on their individual income, they pay their share of income tax along with Federal Income tax and other taxes (if applied). North Dakota State has individual income tax rates from 1.1% to 2.9% depending on the range of income.
State Sales Tax
North Dakota State levies a sales tax rate of 5% for most retail sales. Some of the products and services have different rates of Sales Tax. On new mobile homes and new machinery in agriculture, the rate is 3%. On alcohol, the gross rate is 7%.
If the Sales Tax is not collected on the purchase of any tangible property (shipped to or purchased in North Dakota) then the Use Tax comes into the picture. In North Dakota, a 5% Use Tax is levied on the tangible property along with the other taxes levied depending on the value of the property.
Corporate Income Tax
Every corporate that is conducting business in North Dakota has to pay a bare minimum of corporate income tax. There are 3 slabs of corporate income tax to be paid in North Dakota. These are,
- 1.41% of taxable income for the income slab $0 – $25,000
- $352.55 + 3.55% above $25,000 for the income slab $25,000 – $50,000
- $1,240 + 4.31% above $50,000 for the income slab $50,000 and above
Federal Employment Tax
Every member of the LLC has to pay the self-employment tax over their profit. In North Dakota, the rate of the self-employment tax is 15.3%. This is pass-through taxation. Other than this, there is an employers’ tax to be paid. Employers who pay wages to their employees are required to withhold a tax rate of 7.65% of their taxable wages.
Federal Income Tax
Federal Income Tax is levied on the individual income of the LLC member. Like the State income tax, the Federal government levies tax on the basis of the income of the LLC member. It is a pass-through tax.
Default LLC Tax Classification Rules
By default, the LLCs are categorized as below (In both the categories, separate filing of income is not required):
Disregarded Entity (Single-Member LLC)
A single-member LLC is usually disregarded from the taxes. Hence a single-member LLC is also called a disregarded entity. Under the U.S. tax law, it is assumed that a single-member LLC is owned by an individual (& not by another LLC), so the U.S. tax law levies rules on it as a Sole Proprietor. Single-member LLC’s owner (Sole Proprietor) has to report all the income of the LLC via his own income tax return.
Sole Proprietorship Taxes
As mentioned earlier, the single owner of the LLC is treated as the Sole proprietor of the LLC & has to file the Self-Employment Tax on all of the LLC’s earnings. North Dakota does not levy State Income Tax, so a single-member LLC must file only the Federal Income Tax.
Partnership (Multi-Member LLC)
Any LLC with more than one owner is referred to as Multi- Member LLC & it is taxed as a partnership by default. Similar to the Single Owner or Single Member LLC, this LLC is also a pass-through entity. This means that the income of the LLC passes through the income of the members & they have to file taxes through their own earnings.
Partnership or Multi-Member LLC has to pay taxes similar to the Single Member LLC. If the Partnership LLC is directly owned by individuals, it is exempted from the Franchise Tax. All the members of the Multi-Member LLC are liable to pay Self-Employment Tax & Federal Income Tax.
Options to Change Default Tax Classification
The LLCs are categorized either as sole proprietorships or as partnerships, depending on the number of members the LLC has. This is the default tax classification applicable to LLCs. However, the LLCs have an option of changing the default classification & opting to register under the following categories for taxation purposes:
An LLC can prefer to be treated as a C-corporation by filing form 8832 (the Entity Classification Election Form) with the IRS. The C-corporation is a regular corporation that is subject to corporate taxes & it is not a pass-through entity.
An LLC taxed as a C-Corporation is not a pass-through entity. In a C-corporation, the members/shareholders/ owners are taxed separately. The shareholders of the C-corporation are taxed twice on the dividends that they earn. The dividends of the shareholders are taxed at the corporate level – with a Corporate Tax filed with Form 1120 & at a Shareholder level – an Income Tax filed with Form 1040. Shareholders are subjected to Federal Income Tax.
The S-Corporation is the most common type of corporate structure used by small businesses. It was created to provide corporations with limited liability protection while maintaining the benefits of being a separate legal entity. An LLC can prefer to be treated as S-Corporation by filing Form 2553. S-corporations are small business corporations, that choose to pass through the corporate income, losses, deductions, & credits to the shareholders for the purposes of Federal Taxes.
An S-Corporation is similar to an LLC except that it is treated by the IRS as a corporation for tax purposes. S-Corps do pay corporate income taxes; however, they are still considered disregarded entities for federal tax purposes.
Like an LLC, an S-Corp reports its annual earnings on a separate Schedule E on the member’s personal account. An S-Corp is treated by the IRS much like a partnership for tax purposes. Unlike Partnership, in S Corporation, the shareholders are required to pay Federal Self Income tax on their share of the company’s profits.
Choosing a Classification for Your LLC
In terms of owners’ protection against liability, perpetual existence, & savings in Taxation, Both LLCs (Limited Liability Companies) & Corporations are very much alike. However, with regard to formalities, Taxation, & capital, LLCs & Corporations differ in North Dakota.
Both LLCs and Corporations provide liability protection to their owners. The LLC provides protection against inside liability (towards the employee) & outside liability (towards the creditor). The Corporation usually provides only the inside liability.
Tax Classification Flexibility
For taxation purposes, an LLC has a choice of being treated as a sole proprietorship, Partnership or C-corporation or S-corporation. A corporation can choose to be treated only as C or S Corporation.
As mentioned earlier, the LLC can choose to be treated as a corporation; the Corporation does not have the option of being treated as the LLC. A North Dakota LLC is subjected to Franchise tax, Federal Income Tax, Sales & Use Taxes & State Employment Taxes (for LLCs that have employees)
A regular corporation or a C- Corporation is subjected to corporate tax, which can be filed through Form 1120 every year. The shareholders have to pay the Income-tax, only when they receive dividends from the Corporation. These dividends are taxed twice at the corporate level (on a corporate form)& at the shareholder level (on shareholder form).
An S- Corporation in LLC is not subjected to corporate taxes. But the shareholders are subjected to Taxation – even if they do not receive any dividends. A member of a North Dakota S-corporation has to pay Federal Self employment Tax only on his salary; any other profits that he makes through the LLC are not subject to the 15.3% Self Employment Tax.
Classification of LLC Taxes – At a Glance
|Points of Difference||LLC||S- Corporation||C-Corporation||Sole Proprietorship|
|Taxation||As an LLC, by default, there is no tax levied at the entity level. The members’ income or even the loss is passed through to members or owners.||Similar to LLC, no tax is levied on an S-Corporation at the entity level. The members’ income or even the loss is passed through to members or owners.||The C-Corporation is often taxed at the entity level. The Dividends are taxed at the shareholders’ level.||The Sole- proprietorship as an entity is not taxable. The Sole Proprietor pays taxes as an Individual.|
|Double Taxation||The LLC does not have Double Taxation||There is no Double Taxation in S-Corporation||There is Double Taxation in C-Corporation, only when the Shareholders earn in the form of dividends.||No Double Taxation in a sole proprietorship.|
|Self Employment Tax||The net income of the members or owners is subject to self-employment tax.||The salaries of the shareholder are subject to self-employment tax, but any other profits that the shareholder makes are not subject to the employment tax.||The C-Corporation is subject to self-employment tax.||The Sole-proprietorship is subject to self-employment tax|
|Pass-Through Income/Loss||An LLC is often referred to as a Pass-through entity because its income passes through/ passes to its members.||Yes, An S Corporation is a Pass-through Entity.||No, A C-Corporation is not a Pass-through Entity.||Yes, A Sole-proprietorship is a Pass-through Entity.|
How Do LLCs Pay Taxes in North Dakota
Any LLC operating in North Dakota is liable to pay 2 kinds of taxes- state taxes as well as federal taxes.
In North Dakota, LLCs must file taxes using an Employer Identification Number, or EIN. This number will be issued by the Internal Revenue Service. If you do not have an EIN, you will need to obtain one. You will also need one if you want to hire employees, get business insurance, get workers’ compensation insurance, open a bank account, and file taxes. You can obtain an EIN online for free.
Corporations and LLCs both pay taxes, but in different ways. Corporations pay taxes on their owners’ income, whereas LLCs do not. However, companies can choose to be taxed at the corporate level, so they can avoid the corporate tax burden. However, this can be a hassle, especially if you’re not familiar with the rules and regulations. If you’re a business owner in North Dakota, it’s important to learn the differences between the two.
An EIN is required by law. If you hire employees, you must register your business with the Tax Department. In addition, you’ll need to register for unemployment insurance in North Dakota, if applicable. The Tax Department website provides comprehensive information about how to register and file reports for the state’s unemployment insurance program. The IRS website has additional information about EINs. If you are unsure of which EIN to choose, visit IRS Pub 1635.
An LLC is a business entity, and it can be taxed as either a sole proprietorship or a corporation. The amount you pay depends on your earnings and filing status, but you should be aware that in North Dakota, you will have to pay taxes on the profits of your LLC. The tax-free amount includes business expenses such as healthcare, and some retirement plans. You may also be required to register with the Office of State Tax Commissioner.
In North Dakota, LLCs are taxed similarly to corporations. If your LLC is a multi-member entity, you must file IRS Form 1065 to elect to be treated as a partnership. Profits from your LLC are allocated to the owners in accordance with your operating agreement. Every owner is provided with a Schedule K-1 that outlines their share of the profits from their North Dakota LLC. The individual owner reports this income on his or her annual 1040 tax return. Even if you do not distribute your profits, your North Dakota LLC still taxes you.
Every year, you will have to file an Annual Report with the North Dakota Secretary of State. This report must be filed by November 15th, the year following the year you formed the LLC. Failure to file the report on time will incur a $50 penalty. If you fail to file, your business will be revoked if you do not pay the fee. You should also know that the North Dakota Secretary of State can revoke your business registration if you have not filed the form in time.
C-Corporation. It taxes the dividends of the shareholders at the corporate level as well as at an individual level.
An LLC is often referred to as the pass-through entity because the income or the assets pass through the members or owners of the LLC.
The LLCs have two default classifications. It can be termed as a single-member LLC or a multi-member LLC.
When choosing a different classification for taxation, it is essential to understand the liabilities & taxes applicable in that classification.
Every Tax classification has its own set of benefits & restrictions. Every state will have different taxation rules for each of the categories of business corporations. Depending on the objective of formation of the business entity (Eg. To avoid dual Taxation- one can choose S Corporation, for more flexibility, one can choose the LLC format). It is essential to understand the taxing structure of each country & each Classification; to decide how you wish to treat your LLC.