written by Brenda Logsdon
An LLC (limited liability company) is an entity formed under state law. The owners are considered members and the LLC provides limited liability, similar to corporations. There are no special tax laws pertaining to LLCs as there are with C corporations, S corporations and partnerships.
However, there are check-the-box regulations that allow an LLC to make an election to be taxed as a particular entity (or to be disregarded for tax purposes). The election is filed by completing form 8832, Entity Classification Election. The regulations contain default entity classification rules if an election is not made. An election does not need to be made, if the taxpayer prefers the default classification.
What are the choices of election if the LLC has more than one member?
An LLC with more than one member can elect:
- S corporation (a form 8832 is not required to be filed; by filing form 2553 S corporation election, the LLC is treated as automatically making an election to be a corporation)
What are the choices of election if the LLC has only one member?
An LLC with only one member can elect:
- Disregarded entity
- S corporation (a form 8832 is not required to be filed; by filing form 2553 S corporation election, the LLC is treated as automatically making an election to be a corporation.
What are the default entity classifications if no election is filed?
For federal income tax purposes, the default rules of the regulations treat the LLC as a pass -through entity. An LLC with more than one member is classified as a partnership. An LLC with only one member is classified as a disregarded entity separate from its owner and is taxed as a sole proprietorship (if the sole owner is an individual).
Generally, an LLC with more than one member will want to be treated as a partnership and a single member LLC will want to be treated as a disregarded entity.
Click here to read our recent article about The Pros and Cons of LLCs. If you have any questions regarding LLCs, please contact us today at 417-881-0145.