The short answer
A domestic LLC with two or more members is, by default, taxed as a partnership. The LLC files an information return, Form 1065, and gives each member a Schedule K-1 showing their share of income, deductions, and credits. The partnership generally pays no federal income tax; the members do, on their distributive shares, whether or not they took the money out.
Legal structure vs. tax classification
| Layer | What it means |
|---|---|
| LLC (state law) | A legal entity formed under state law that can limit owners' liability; it is not itself a federal tax classification |
| Default federal classification | Two or more members: partnership. One member: disregarded entity |
| Partnership taxation | Form 1065 and Schedules K-1; income passes through to members |
| Corporate election | An LLC can elect on Form 8832 to be taxed as a corporation, and then may elect S corporation status |
If membership drops to one, a partnership LLC becomes a disregarded entity; if a single-member LLC adds a member, it becomes a partnership, unless it has elected corporate treatment. For the corporate option, see LLC vs. S-Corp.
How income flows to members
- Distributive share: each member's share of income, gain, loss, deduction, and credit, generally under the partnership agreement, reported on Schedule K-1.
- Taxed whether or not distributed: cash distributions are not the same as taxable income.
- Separately stated items: rental income and portfolio income, such as interest, dividends, and capital gains, are reported separately from the partnership's trade or business income.
- Guaranteed payments: fixed payments for services or capital, determined without regard to partnership income; deductible by the partnership and ordinary income to the member, with no income tax withholding.
Self-employment tax: depends on the member
| Member | Generally included in net earnings from self-employment |
|---|---|
| General partner | Share of ordinary business income plus guaranteed payments |
| Limited partner | Generally only guaranteed payments for services |
| LLC member | Depends on whether the member is treated as a limited partner under section 1402(a)(13) — not settled by LLC status alone |
Rental real estate income is generally not net earnings from self-employment.
Deadlines and extensions
| Item | Calendar year 2025 partnership |
|---|---|
| Form 1065 due | The 15th day of the 3rd month after year-end: March 16, 2026 (March 15 fell on a weekend) |
| Extension | Form 7004 filed by the original due date — generally an automatic 6-month extension of time to file |
| Schedule K-1 | Attached to Form 1065 and furnished to each partner when due |
| Partners' own returns | Their individual deadlines and tax payments are separate; the partnership extension does not extend them |
Penalties: two different kinds
| Penalty | Returns or statements due in 2026 | Due in 2027 |
|---|---|---|
| Late or incomplete Form 1065 (section 6698) | $255 per partner per month, up to 12 months | $260 per partner per month, up to 12 months |
| Late, missing, or incorrect Schedule K-1 to a partner (section 6722) | $340 per Schedule K-1, with annual caps | $340 per Schedule K-1, with higher annual caps |
The return penalty multiplies by the number of partners, so even a small LLC with three members that files three months late on a 2025 return faces $255 × 3 × 3 = $2,295, unless the failure is due to reasonable cause.
Basic limits on deducting losses
- Basis first: a partner can deduct a share of partnership losses only up to their adjusted basis in the partnership at year-end; unused losses carry forward.
- Basis includes contributions, the partner's share of income, and generally a share of partnership liabilities, reduced by distributions and losses.
- Then the at-risk rules, passive activity rules, and excess business loss limitation apply, in that order.
Spouse-owned businesses
- General rule: spouses who jointly own and operate an unincorporated business and share profits and losses are partners and must file Form 1065.
- Qualified joint venture: spouses filing jointly who both materially participate can elect out of partnership treatment — but not if the business is held in a state-law entity such as an LLC.
- Community property: if spouses wholly own an entity as community property under the laws of a state, foreign country, or U.S. possession, no one else is an owner, and it is not treated as a corporation, they can choose to treat it as a partnership or as a disregarded entity. A change in reporting position is treated as a conversion of the entity.
A written operating agreement that sets out how profits, losses, distributions, and guaranteed payments are shared makes the K-1s easier to prepare and defend. Partnership tax can become complex quickly — consider a tax professional for the first year's return.