LLCs

A Limited Liability Company (LLC) is a business structure created by state statute. Laws governing LLCs vary widely from state to state but for federal tax purposes, the variations among state laws have no effect on how the IRS views LLCs

Owners of an LLC are called members. States do not typically restrict who can own a membership interest in an LLC. Members may include individuals as well as corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit “single-member” LLCs, those having only one owner.

A few types of businesses generally cannot be LLCs, such as banks and insurance companies. Check your state’s requirements and the federal tax regulations for further information. There are special rules for foreign LLCs.

Classifications

Depending on whether special elections are made by the LLC and whether there is more than one member, the IRS will treat an LLC as either a corporation, partnership, or as part of the LLC’s owner’s tax return (a “disregarded entity“).

Specifically, a domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and affirmatively elects to be treated as a corporation or files Form 2553 and elects to be treated as an S corporation (which is also treated as if Formm 8832 had been filed).

An LLC with only one member is treated as an entity which is disregarded as separate from its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes), unless it files Form 8832 and affirmatively elects to be treated as a corporation or files Form 2553 and elects to be treated as an S corporation.

The automatic classifications as a partnership (where there is more than one member) or as a disregarded entity (where there is only a single member) are referred to as default classifications.

Electing out of Default Classification

An LLC that does not want to accept its default federal tax classification, or that wishes to change its classification, uses either Form 8832, Entity Classification Election, or Form 2553, Election by a Small Business Corporation, to elect how it will be classified for federal tax purposes.

Generally, an election specifying an LLC’s classification cannot take effect more than 75 days prior to the date the election is filed, nor can it take effect later than 12 months after the date the election is filed. An LLC may be eligible for late election relief in certain circumstances.