The LLC type of business entity borrows some features from the corporate form and some features from the partnership form. The LLC is neither fish nor fowl; it’s an unusual blending of features that have worked well for many business ventures.

A business organized as an LLC has the option to be a pass-through tax entity instead of paying income tax on its taxable income. A partnership doesn’t have an option; it’s a pass-through tax entity by virtue of being a partnership.

Following are the key income tax features of partnerships and LLCs:

  • Pass-through tax entity: A partnership is a pass-through tax entity, just like an S corporation.

    When two or more owners join together and invest money to start a business and don’t incorporate and don’t form an LLC, the tax law treats the business as a de facto partnership. Most partnerships are based on written agreements among the owners, but even without a formal, written agreement, a partnership exists in the eyes of the income tax law (and in the eyes of the law in general).

  • Making a choice: An LLC has the choice between being treated as a pass-through tax entity and being treated as a taxable entity (like a C corporation). All you need to do is check off a box in the business’s tax return to make the choice.

    Many businesses organize as LLCs because they want to be pass-through tax entities (although the flexible structure of the LLC is also a strong motive for choosing this type of legal organization).

The partners in a partnership and the shareholders of an LLC pick up their shares of the business’s taxable income in the same manner as the stockholders of an S corporation.

They include their shares of the entity’s taxable income in their individual income tax returns for the year. For example, suppose your share of the annual profit as a partner, or as one of the LLC’s shareholders, is $150,000. You include this amount in your personal income tax return.