What is a K-1 and Does My LLC Need to File One? 

    by Benjamin Aronson
Updated May 29, 2024

If you’re an entrepreneur running an LLC, there’s a good chance you’ve heard the term “K-1” thrown around, but you might not be sure what it means or if it will affect your business.

Don’t worry, you’re not alone. In this article, I’m going to address which LLCs need to file Schedule K-1 forms, what K-1s really are, and how they play a role in the overall taxation picture. We will go over that and more so let’s get started!

What is a K-1 Form and How is it Related to LLC Filing?

An LLC is taxed in a few different methods, but the “pass-through taxation” approach is by far the most popular. This occurs when an LLC’s owners claim the company’s yearly profits on a personal tax return. This isn’t comparable to Corporations that pay their own income taxes on profits.

A Schedule K-1 is a specific form that takes a deep dive into the income, gains, losses, deductions, credits, and liabilities of a taxpayer in a partnership business. On the K-1 form, each owner (LLC member or manager) needs to claim their portion of ownership’s share of profit or loss for their own individual tax returns.

A partnership may be an S-Corporation or an LLC taxed as a partnership, often known as a multi-member LLC.

Usually, the LLC itself is not taxed like a corporation, but rather its owners are individually taxed. Each owner needs to claim their portion of ownership’s share of profit or loss on their own individual tax returns.

The K-1 is an additional information form that is included to form 1065 (or form 1140S for S-Corps) which is a mandatory tax returned for partnership taxation. But how does a K-1 actually fit into form 1065?

How Does IRS Schedule K-1 fit in Form 1065?

Schedule K-1 reports the amount of income that was generated by each partner in a business while also identifying the percentage of company shares owned by each individual.

As mentioned above, LLCs that have chosen pass-through taxation entities and that are taxed as a partnership will file a K-1.

The K-1 has approximately 50 questions and is a page long. You will most probably receive a copy of your Schedule K-1 from your accountant or whoever is responsible for filing for partnership forms.

How a K-1 looksWhen you submit form 1065 to the IRS, you can file your Schedule K-1 form. The quickest method of filing is to submit the form electronically through IRS Free File or tax preparation software. You may also send the form by mail if you’d like.

Which LLC Files Schedule K-1 Tax Form?

Typically, LLCs are taxed by the pass-through taxation method. This is when the owner of an entity pays taxes on the business profits. There are also cases when LLCs (those that elected to be treated as a corporation for federal income tax purposes) choose to be taxed by the double taxation method. This is when income from a business is taxed twice.

Let’s take a second and identify each LLC formation and the corresponding tax forms that must be filed:

Single Member LLC

A single-member LLC is taxed as a sole proprietorship. This means that the single owner must report the profits from their LLC using the Schedule C form. That form then must be attached to form 1040, an individual tax return.

The main advantage of being a single-member LLC is that the owner is treated like a sole proprietorship which offers the easiest and most basic taxation method. Also, the LLC owner enjoys one of the best perks of forming an LLC which is limited liability protection.

  • Which IRS Tax Form: Form 1040. This is an Individual tax return and is the main document that U.S taxpayers must use in order to file their annual tax returns.
  • Which IRS Schedule: Schedule C. A single-member LLC must report their income in the IRS Schedule C and attach it to form 1040.

Note: For a visual description, scroll down.

Multi-member LLC

A multi-member LLC is taxed as a partnership. Just as the profits of a single-member LLC pass through to the business owner, the profits of a multi-membered LLC are passed through to the LLC partners based on the percentage ownership of the business.

This means that owners of a multi-membered LLC must report the profits from their LLC using the Schedule K-1 form which then must be attached to form 1065. 1065 is a tax return for partnership income.

  • Which IRS Tax Form: Form 1065. This is a partnership tax return and is the main document that joint business owners must use in order to file their annual tax returns.
  • Which IRS Schedule: Schedule K-1. Each partner in a multi-member LLC must submit and declare their portion of income to the IRS with a K-1 attached to form 1065.

LLC taxed as an S- Corp

LLC owners may also classify for S-Corp taxation. S-Corp taxation is almost identical to the income reporting method as partnerships, but there are a few differences.

The most unique attribute to filing as an S-Corporation is being able to class an LLC owner as an employee. A situation like that can be very favorable as owners can then receive a more normalized salary and benefits. Another note in order to qualify for an S-Corp is that there must be less than 100 LLC owners and all of them must be US citizens.

  • Which IRS Tax Form: Form 1120S. This is the main tax document that an S-Corporation must file in order to stay compliant with the IRS.
  • Which IRS Schedule: Schedule K-1. Each owner in an LLC taxed as an S-Corp must submit and declare their share of income to the IRS with a K-1 and attach it to the 1120S form.

LLC taxed as a C- Corp

If decided upon by the members, an LLC can be taxed as a C- Corporation. This means that the profits of the business will be subjected to double taxation. Double taxation is when the profit of a business is first taxed on the corporate level, which is 21%, then taxed again at 15%-20% once the owners distribute a dividend.

LLCs usually don’t elect to be taxed as C- Corp. This most often increases the tax liability.

  • Which IRS Tax Form: Form 1120. This form is a C- Corporation income tax return and is the main document that a corporation must file.
  • Which IRS Schedule: If you choose to file as a C-Corp, try speaking to an accountant as documents may vary.

Do I file a K-1 or Schedule C?

Image illistrating who files a 1040, 1065 or 1140S and who files K-1 or C

It can get a bit confusing understanding whether you have to file a K-1 or a Schedule C, so we took the time to write it out in a very clear manner below. Take a second to study the chart above, it really simplifies who needs to file what.

Key Take-Aways

  • LLCs that are taxed as a partnership or as partnerships (multi-member LLCs) and LLC that have chosen to be taxed as S-Corps file their share on income on a Schedule K-1
  • Single-member LLCs file their individual share of business income on a Schedule C

When are K-1s due?

K-1s are due by April 15th and if your business is using a different fiscal year, then the deadline is no later than the third month after the end of the fiscal year.

The IRS recommends that partnerships file Form 1065 by March 15. By this date, partnerships must also deliver Schedule K-1s to each partner.

On April 15, personal federal income tax returns are due, which gives you less than a month to get your K-1 to the IRS.

How to Read a K-1, (Form 1065)?

The Schedule K-1 for form 1065 has three parts:

  1. Information About the Partnership
  2. Information About the Partner
  3. Partner’s Share of Current Year Income, Deductions, Credits, and Other Items

Aside from information about your actual business and yourself, the majority of data you’ll need to complete Schedule K-1 will come from the Income and Expenses section in Form 1065.

Part I. Information About the Partnership:

Part 1 in K-1 formThis section covers the generic information about the partnership which includes the business’s name, address, and the LLC’s EIN.

It can take anywhere from a day to two weeks to obtain an EIN, and if your LLC hasn’t applied for one make sure you check off that box.

Note: Zenbusiness and Incfile are two leading formation companies that can help you file the necessary paperwork and obtain your EIN if you haven’t done so.

Part II. Information About the Partner:

Part 2 in K-1 formThis section is slightly more extensive than part one. It includes the partner’s name and address and the amount of their share in the business.

The form continues to ask your share of the partnership’s profits, loss, and capital, as well as, your share in the partnership’s liabilities (or debts). You will also mention how much capital you’ve invested into the partnership and specifically when you invested throughout the year.

Part III: Partner’s Share of Current Year Income, Deductions, Credits and Other Items:

Part 3 in K-1 formAn LLC taxed as a partnership is required to report each partner’s distributive share of all income, deductions, credits and other items from the business. This section is where the LLC will report each item on a separate line in Part III of the form, using descriptive titles for each part.

What Else Should I Know About Schedule K-1 and How it affects my LLC?

We’ve just about covered it all, but I just want to go over a few tips for you to keep in mind which will result in a much easier and stress-free experience.

  1. It’s okay if there are some sections empty in your K-1. Depending on the nature of your business you may not have any deductions, losses or expenses. As long as the items that are filled out are 100% accurate and truthful then everything should be okay!
  2. Send out your LLCs K-1 Every year! Whether your business was profitable or not, you should still send out and file your K-1 annually. As long as your business is a registered entity, you will have to file your K-1 as an LLC partnership.
  3. File your personal taxes with your K-1. The K-1 is an essential form to file if you are in a partnership and you must send everything to the IRS together. As you file your personal income taxes, be sure to include the K-1!

Wrapping up

So, what is a K-1, and do you need to file one? For a quick recap, a K-1 is a document that reports the financial information of a partnership to its partners. In other words, it’s an informational tax return for partnerships. If your LLC is taxed as a partnership, then you will need to file a K-1 every year, no exceptions.

I hope that this post improved your knowledge of what a K-1 is and how this form will affect your business.

Resources:

  1. (IRS) LLC Filing as Corproations or Partnerships
  2. (IRS) Form 1065
  3. (IRS) Schedule K-1 Form
  4. (IRS) Partners Instructions
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