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Need Some Deductions for 2011?

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10 Oddball Tax Deductions

11 Most Overlooked Tax Deductions

Updated for 2011

Business Structures

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Classification of LLCs

1) Single-person LLC:

A single-person LLC will automatically be taxed as a sole proprietorship under the default rule UNLESS an election is made on Form 8832 to be taxed as a C-corporation or on Form 2553 (instructions) to be taxed as an S-corporation.

Terminology:

The  default rule, as it applies to a single-person LLC, simply means if you, as a single-owner of an LLC, do not make an entity classification election for your LLC to be treated as a C or S-corporation for tax purposes, then your LLC will automatically be treated as a sole proprietorship for tax purposes.

A multiple-member LLC (two or more members) is automatically treated as a partnership for tax purposes unless an entity classification election is made to treat the LLC as a C or S corporation for tax purposes.

To make an entity classification election to treat the LLC as a C-corporation, Form 8832 is file.

To make an entity classification election to treat the LLC a an S-corporation, File Form 2553. It is not necessary to file Form 8832.

Tax filing:

A single-person LLC files Schedule C (or Schedule F for a farming business) annually.

If an election is made to be treated as a C-corporation, business income and expenses are reported on Form 1120 (instructions) is filed annually. If an election is made to be treated as a S-corporation, Form 1120S (instructions) is filed annually.

If an election is made to treated as either a C or S corporation any LLC owner (member) that works for the business is treated as an employee of the business.

This means the employment tax rules that apply to non-owner employees also apply to any member/employee (e.g., the LLC member gets a paycheck, taxes are withheld, a W-2 forms is issued at year-end, etc.). 

Keep in mind, although an election may be made for the LLC to be treated as a C or S-corporation for tax purposes, legally, the business is still an LLC and is governed under the laws of the state of formation.

In other words, if an election is made to change the tax status of an LLC, the election doesn't change the legal status of the LLC.

Terminology: Disregarded entity

The term disregarded entity is used in connection with a single-person LLC. It means the IRS treats a single-person LLC, for tax purposes, as a sole proprietorship.

A sole proprietorship is not a separate entity. In other words, legally, the business is not distinguished from its owner. The owner and the business are considered one and the same. 

In contrast, legally, the corporate and partnership forms of business are considered separate entities, separate and apart from the owners. This is true even though individual partners may be liable for partnership debts.

2) Two or More Members:

An LLC will automatically be taxed as a partnership under the default rule unless an election is made to be taxed as a corporation on Form 8832.

Form 1065 is filed for a multiple-member LLC.

3) Election to be Taxed as a Corporation:

An election on Form 8832 must be made to be taxed as a corporation.

Tax filing:

If a multiple-member LLC makes an election to be taxed as a C-corporation, then Form 1120 is filed annually instead of Form 1065.

If an election is made to be taxed as an S-corporation, then Form 1120S is filed annually instead of Form 1065.

If an election is made to treat the LLC as either a C or S Corporation, then any LLC who works for the LLC is treated as an employee. This means the same employment tax rules that apply to non-owner LLC employees apply to member/employees.

If no election is made to be taxed as either a C or S corporation, then, Form 1065 is filed annually.

Next:

Limited Liability Company: Making a Business Classification Election for an LLC

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