When an LLC has two or more members, the Internal Revenue Service automatically treats it as a partnership for federal income-tax purposes—unless the owners make a formal election to be taxed as a corporation. This default “multi-member partnership” classification preserves limited-liability protection under state law while letting income and losses flow straight through to the individual members. The result is a single layer of tax at the ownership level, accompanied by unique compliance obligations, allocation mechanics, and planning opportunities that every co-owned LLC should understand.
Why Form 1065 Matters
Unlike a single-member LLC, the entity itself must file an annual Form 1065, U.S. Return of Partnership Income. Although no federal tax is paid with this return, Form 1065 assembles the company's income statement, balance sheet, and a multitude of schedules that reconcile capital accounts and identify items requiring special treatment on each member’s personal return. Key sections include:
Page 1—ordinary business income (or loss).
Schedule K—aggregates each “special” item such as interest, dividends, Section 179 deductions, and foreign taxes.
Schedule L/M-1/M-2—tracks book-to-tax differences and each member’s capital.
Schedule K-1 (Form 1065)—the personalized report card that tells each owner what to place on their Form 1040.
The filing deadline for calendar-year partnerships is March 15 (or the next business day if the 15th falls on a weekend or holiday). An automatic six-month extension moves it to September 15, but K-1s still need to reach members quickly so they can complete their own returns by April 15.
Dappr’s integrated return-filing service opens the day after your fiscal year ends—January 1 for most customers. Start the process in Accounting > Taxes and the system will pull in your books, prepare Form 1065, and electronically deliver K-1s to every member once you approve the return.
If you can’t finalize books by the original March 15 deadline, you may obtain a six-month extension to September 15 by filing Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns. Form 7004 must be submitted on or before March 15, and it does not extend the time for partners to pay any tax ultimately due on their own returns.
Within Dappr, you can request the extension directly from Accounting > Taxes (starting day after end of fiscal year). Select “File Extension”, review the pre-filled Form 7004 details, and our system will e-file the form with the IRS on your partnership’s behalf—ensuring your LLC receives the automatic six-month grace period without extra paperwork on your end.
Allocating Profits, Losses & Guaranteed Payments
Partnership taxation revolves around allocations. Unless your operating agreement specifies otherwise, the default rule is to split every tax item in proportion to ownership percentages. However, LLC members often want flexibility—for example, awarding extra cash flow to one partner via a guaranteed payment while keeping profit shares intact. The IRS allows these variations as long as allocations have “substantial economic effect” (they must mirror how money really moves inside the business).
Example
Imagine Blue Peak LLC with two equal members, Alex and Jordan, who agree that Jordan will receive a $20,000 guaranteed payment for day-to-day management, and the remaining profit will be split 50-50.
Item | Amount | Alex’s K-1 | Jordan’s K-1 |
Ordinary income before guaranteed payment | $120,000 | — | — |
Guaranteed payment to Jordan | –20,000 | — | 20,000 (self-employment income) |
Remainder to allocate 50-50 | 100,000 | 50,000 | 50,000 |
Total taxable income per member | — | 50,000 | 70,000 |
Jordan reports $20,000 as self-employment earnings from a guaranteed payment plus $50,000 of ordinary pass-through income, while Alex reports only $50,000. Both amounts flow to Schedule E and ultimately Form 1040.
Capital Accounts, Basis & Loss Limitations
Each member has an “outside basis” (their investment in the partnership) that increases with contributions and share of income, and decreases with distributions or losses. A member cannot deduct losses beyond this basis. Schedule K-1 now shows both tax basis and at-risk amounts, giving owners a snapshot of how much loss they may legitimately claim.
Because Dappr Accounting maintains double-entry books and classifies equity activity automatically, upgrading to the Business accountant subscription (starting $890 per year or $89 per month) ensures capital accounts match IRS reporting requirements at year-end.
Self-Employment Tax for Members
Active members generally pay self-employment (SE) tax on their distributive shares of ordinary business income and on guaranteed payments. Limited partners—defined narrowly under Section 1402(a)(13)—are exempt from SE tax on their distributive share (but still owe it on guaranteed payments). Quarterly estimated payments using Form 1040-ES help members cover both income and SE tax liabilities. Due dates are the same as for individuals: April 15, June 15, September 15, and January 15 of the following year.
The Qualified Business Income (QBI) Deduction
Enacted under the Tax Cuts and Jobs Act, Section 199A allows many pass-through owners to deduct up to 20 percent of “qualified business income.” For partnership income this means:
Definition of QBI—generally the net ordinary income shown on the K-1, excluding capital gains, dividends, interest, and guaranteed payments.
Phase-ins & limits—For 2025 returns, taxable income above roughly $191,950 (single) or $383,900 (joint) triggers wage-and-capital tests; income beyond $241,950/$483,900 completely subjects the deduction to those limits for “specified service” trades.
W-2 wage/UBIA limitation—When owners exceed the threshold, the QBI deduction is capped at the greater of (a) 50 percent of allocable W-2 wages, or (b) 25 percent of wages plus 2.5 percent of the unadjusted basis of qualified property.
Because each member applies the limitation on their own return, the partnership must disclose total W-2 wages and qualified property basis on Schedule K-1. Dappr’s filing service populates these fields automatically from your payroll and fixed-asset registers.
Partnership Audit Rules (BBA) – A High-Level View
Since 2018, the Bipartisan Budget Act (BBA) regime allows the IRS to assess tax at the partnership level if the entity does not timely elect out or appoints a designated partnership representative. Most smaller LLCs with no more than 100 K-1 recipients and no entity partners can “elect out” each year on Form 1065 by checking the appropriate box, shifting any audit adjustments back to the members’ individual returns.
State-Level Nuances
States vary widely: some impose entity-level franchise taxes or require pass-through entity (PTE) returns, while others adopt elective PTE-level taxes as SALT cap work-arounds. Because these rules differ sharply, we cover them in individual state articles; nonetheless, partners should verify:
Filing thresholds for state partnership returns.
Composite-return or withholding requirements for non-resident members.
Franchise tax or annual LLC fees that apply regardless of profit.
Recordkeeping & Year-End Workflow
Accurate, real-time bookkeeping underpins every allocation, and on this task Dappr Accounting is your go-to tool. Best practices include:
Maintaining separate bank accounts and issuing partner distributions through the books rather than off-ledger cash transfers. Use your Dappr Financial Account consistently to satisfy this best practice.
Reconciling member capital on a regular basis, as defined in your LLC's operating agreement. This is one of the onboarding selections when you form your business with Dappr. If one or more members will
Tracking guaranteed payments distinctly from regular payroll.
When fiscal year-end closes, Dappr Accounting consolidates these figures, and you can launch the tax-return wizard in Accounting > Taxes. Our workflow packages the data for Form 1065, generates K-1s, and guides you through e-signature and e-filing—simplifying a process that otherwise involves dozens of manual schedules.
Conclusion
A multi-member LLC taxed as a partnership offers pass-through simplicity coupled with robust flexibility in allocating profits, losses, and guaranteed payments. Owners must respect the partnership-return framework—Form 1065, Schedule K, and individualized K-1s—while keeping an eye on self-employment tax obligations and valuable deductions such as the 20 percent QBI benefit. Clean books, timely estimated payments, and awareness of state quirks protect the entity’s good standing and each member’s personal compliance. When filing season arrives, Dappr’s integrated service and Business accountant team can shoulder the heavy lift so your partnership tax picture is accurate and on time.
Disclaimer: This content is for educational purposes only and does not constitute tax, legal, or accounting advice. Circumstances vary, so consider consulting a qualified tax professional or engaging Dappr’s CPA team at [email protected] (or chat with us online) before acting on any information here.