Tax Information for Limited Liability Companies

There is no federal tax return specifically meant for an LLC. Find out how federal tax laws classify and tax LLCs.

The limited liability company (LLC) is a business structure that’s increasing in popularity. This business entity is a state-created legal entity and, as such, has a separate legal existence. Therefore, personal assets are kept separate from business assets and are not reachable by creditors with claims against the LLC.

Each state has its own registration and business requirements for an LLC. There’s no federal tax return specifically for the LLC. By default, they’re taxed as a sole proprietorship or general partnership, but they also have the option to be taxed as a C corporation or S corporation, provided they meet the qualifications. So what type of federal tax return should an LLC file?

Federal tax laws will automatically classify and tax certain LLC business entities as corporations.

These entities are:

• A business entity formed under a federal or state statute or under a statute of a federally recognized Indian tribe if the statute describes or refers to the entity as incorporated or as a corporation, body corporate, or body politic.
• An Association under Regulations Section 301.7701-3.
• A business entity formed under a federal or state statute if the statute describes or refers to the entity as a joint-stock association.
• A state-chartered business entity conducting banking activities if any of its deposits are insured by the FDIC.
• A business entity wholly owned by a state or political subdivision thereof, or a business entity wholly owned by a foreign government or other entity described in Regulations Section 1.892.2-T.
• A business entity taxable as a corporation under a provision of the code other than Section 7701(a)(3).
• Certain foreign entities (see Form 8832 instructions).
• An insurance company.

An LLC that has at least two members can choose to be classified as either a partnership or an association taxable as a corporation. A business entity with a single member can choose to be classified as either an association taxable as a corporation or as a disregarded entity. A disregarded entity is taxed like a sole proprietorship.

If the LLC does not choose how it wants to be classified, the entity will default to a pre-determined classification for federal tax purposes. If the LLC has at least two members and is not required to file as a corporation, it will default to a partnership classification and be required to file a partnership tax return. An LLC with only one member will default to the disregarded entity status and be required to file as a sole proprietor and complete the required schedules as part of the single-member owner’s 1040.

For a variety of business reasons, an entity may wish to be classified as something other than its default category. To do this, or to change its current classification, an entity must file Form 8832, Entity Classification Election. The election to be taxed as the new entity will be in effect on the date the entity enters on line 4 of Form 8832. If the entity does not enter a date on Line 4, the election will be in effect as of the date the form is filed. Additionally, the election can’t take place more than 75 days before the filing date for Form 8832, nor can the election effective for a date that is more than 12 months after Form 8832 is filed. However, if the election is the “initial classification election”, and not a request to change the entity classification, there is relief available for a late election (more than 75 days before the filing of Form 8832). See the instructions for Form 8832, which are attached to the tax form.

Many of the rules for making the election for an entity to change its classification are in the instructions for Form 8832. These instructions include information on how a newly formed entity may be eligible to make an election to classify itself as something other than its default category.

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Visit www.irs.gov and click on the e-file logo where you’ll find a listing of IRS e-file and e-pay options to meet your individual and business filing needs. 

For additional LLC tax implications and tax information, please visit the IRS website at www.irs.gov.