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Making a Business Classification Election for an LLC
Here are the rules for a new eligible entity:
Assuming you already formed an LLC, you have three options:
- Do nothing.
- The default tax treatment (discussed below) will apply to your LLC.
- You're not required to make an entity classification election.
- Elect C-corporation tax treatment for your LLC.
- Elect S-corporation treatment for your LLC.
- You must file Form 2553.
- Note: The IRS does not require Form 8832 to be filed if an an LLC elects S-corporation tax treatment. Just file Form 2553.
The default classification for federal tax purposes refers to how the LLC will automatically be taxed if no entity election is made.
An entity election is made by filing either Form 8832, if C-corporation tax treatment is preferred, or Form 2553, if S-corporation tax treatment is preferred.
If no entity classification election is made, the following default tax treatment will apply:
- Single-Member LLC:
- A default classification of sole proprietorship will apply to a single-member LLC.
- The LLC owner files Schedule C to report business income and expenses.
- Multiple-Member LLC:
- A default classification of partnership will apply to a multiple member LLC (two or more members).
- The LLC files Form 1065.
- LLC members receive Schedule K-1 at year end and report the items shown on Schedule K-1 on their individual income tax return.
IRS Recognizes the Following Business Categories for Federal Income Tax Purposes:
- Sole proprietorship (file
Schedule C or
Schedule F):
- One owner
- Business not incorporated
- Partnership (file Form 1065):
- Two or more owners
- Business not incorporated
- C -corporation (file
Form 1120):
- Not a pass-through entity
- Income, deductions, losses, and credits do not flow through to shareholders
- S-corporation (file
Form
1120S):
- S-corporations start out as C-corporations
- S-corporation tax treatment is applied for on Form 2553 after the business is incorporated
- S-corporations are taxed similar to partnerships where income,
deductions, credits, gains, and losses pass through the entity to
the owners who report these items of their individual income tax
returns.
- Schedule K-1 is issued annually to each of its owners reporting the above items.
IRS Does Not Recognize an LLC as a Business Category
Although an LLC is a legal form of business, subject to the laws of the state of formation, the IRS does not recognize an LLC as a business category for federal income tax purposes.
There are no federal income tax forms specifically designed for LLCs.
Next:
Limited Liability Company: Tax Identification Numbers for an LLC
Related Links
- Your Limited Liability Company: An Operating Manual
- What is a Limited Liability Company?
- Legal Implications of Operating as a Limited Liability Company
- Reasons for LLC Popularity
- Classification of LLCs
- Tax Filing for a Limited Liability Company
- LLC versus S-corporation
- Sole Proprietorships
- Partnerships
- Corporations
- S-corporations
Copyright © 2008-2012 Larry Villano. All rights reserved.