Classification of LLCs

Single-Member LLC

  • The term disregarded entity is used in connection with a single-member LLC. It means the IRS treats the LLC as a sole proprietorship for tax purposes because the owner and business are one and the same - there is no separate entity.. In contrast, the corporate and partnership forms of business are considered separate entities from a legal standpoint. They are separate and apart from the owners. This is true even though individual partners may be liable for partnership debts.
  • A single-member LLC will automatically be taxed as a sole proprietorship under the default rule unless an election is made to treat the LLC as either a C corporation (Form 8832) or on S corporation (Form 2553).
  • The default rule, as it applies to a single-member LLC, simply means if you 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.
  • If an election is made to treat the LLC as either a C or S Corporation, then any LLC member who works for the LLC is treated as an employee. This means the same employment tax rules that apply to a non-owner LLC employee also apply to an LLC member/employee.

Multiple-Member LLC

  • A multiple-member LLC includes two or more members and 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 must be filed.
  • To make an entity classification election to treat the LLC a an S corporation, Form 2553 is filed. It is not necessary to file Form 8832 when making an election to treat the LLC as an S corporation.

Tax Filing Rules

  • A single-member LLC files Schedule C (or Schedule F for a farming
  • A multiple-member LLC files Form 1065 annually If no election is made to be taxed as either a C or S corporation..
  • If an election is made by either a single-member LLC or multiple-member LLC to treat the LLC as a C corporation, Form 1120 is filed annually.
  • If an election is made by either a single-member LLC or multiple-member LLC to treat the LLC as an S corporation, Form 1120S is filed annually.
  • If an election is made by either a single-member or multiple-member LLC to treat the LLC as either a C or S corporation, any LLC member who works for the business is treated as an employee of the business and employment tax rules must be complied with (e.g., the LLC member/employee gets a paycheck, taxes are withheld, employment taxes are paid, a W-2 forms is issued at year-end, etc.).

Legal vs Tax Treatment:
While an election may be made to treat the LLC as a C or S corporation for tax purposes, legally, the business is still subject to the laws of the state of formation. In other words, electing C or S corporation tax treatment is simply a tax election and has no affect on the legal status of the business.

File your personal and small business taxes (Schedule C)