The current rule is that any owner who works in or helps manage the business must pay this tax on his or her distributive share (rightful share of profits). However, owners who are not active in the LLC -- that is, those who have merely invested money but don't provide services or make management decisions for the LLC -- may be exempt from paying self-employment taxes on their share of profits. The regulations in this area are a bit complicated, but if you actively manage or work in your LLC, you can expect to pay the self-employment tax on all LLC profits allocated to you.

Each owner who is subject to the self-employment tax reports the amount due on Schedule SE, which must be submitted annually with his or her tax return. LLC owners (and sole proprietors and partners) pay twice as much self-employment tax as regular employees, because regular employees' contributions to the self-employment tax are matched by their employers. (However, they also get to deduct half of the total amount from their taxable income, which saves a few tax dollars.) The self-employment tax rate for 2007 for business owners is 15.3% of the first $97,500 of income and 2.9% of everything over $97,500.

State Taxes and Fees

Most states tax LLC profits the same way the IRS does: The LLC owners pay taxes to the state on their personal returns, while the LLC itself does not pay a state tax. A few states, however, do charge the LLC a tax based on the amount of income the LLC makes, in addition to the income tax its owners pay. For instance, California levies a tax on LLCs that make over $250,000 per year; the tax ranges from about $900 to $11,000.

In addition, some states impose an annual LLC fee that is not income-related. This may be called a "franchise tax," an "annual registration fee" or a "renewal fee." In most states, the fee is about $100, but California exacts a hefty $800 "minimum franchise tax" per year from LLCs. Before forming an LLC, find out whether your state charges a separate LLC tax or fee. For more information, check the website of your state's secretary of state, department of corporations, or department of revenue or tax.

If you're interested in forming an LLC, see Form Your Own Limited Liability Company, by attorney Anthony Mancuso (Nolo).