First, some information about LLC taxation, then an answer to the question.
How LLCs are Taxed
By default, if you do not elect otherwise, your LLC is taxed in one of two ways, depending on how many members are in the LLC:
- A single-member LLC is considered a disregarded entity and is taxed as a sole proprietorship, filing Schedule C for the individual's personal tax return.
- A multiple-member LLC is taxed as a partnership. The partnership files an information return on Form 1065, with Schedule K-1's for each member/partner.
Advantage of the Election
Usually businesses select the tax form that will yield the lowest taxes. The personal tax rate (for sole proprietorships and partnerships) at the high end of the tax tables is higher than the highest corporate rate, so if your income, including your LLC net income, is very high, you might want to remove your business from being included in your personal taxes.
Disadvantage of the Election
One big advantage of an LLC is that owners avoid double taxation - paying taxes on the income of the corporation and also on income received as dividends. Going to the corporate form means you will be subject to double taxation, so the decreased tax had better be significant.
Before you make any decisions regarding your LLC, including this election, spend some time working out "what if" scenarios with your CPA and/or tax adviser. Be sure you are making your decision based on reasonable knowledge of the future (as much as any of us can know it).
How to Make the Election
If you decide to make this election, here is some more information you need to know:
- The election is made on IRS Form 8832 - Entity Classification Election.
- The form allows "eligible entities" to file this election. LLCs are specifically stated to be eligible entities.
- An LLC files this election to be an "association." The IRS uses the term "association" to mean "an eligible entity taxable as a corporation by election...."
- The form includes a consent statement which may be signed by all members, or by one member on behalf of all members. If one member signs, there should be some record in company membership meetings that all members approved this election.
- You must provide the name(s) and identifying number(s) of owners (Social Security Number for a single-member LLC, and Employer ID Numberfor multiple member LLC).
What Happens to the Old Entity
When your election to corporate status becomes effective, the IRS determines that all the assets and liabilities of the previous business (sole proprietorship or partnership) are contributed to the corporation in exchange for shares of corporate stock.
When to File
The election to be taxed as the new entity will be in effect on the date entered on line 8 of Form 8832. The election cannot take effect more than 75 days before he date the election is filed, nor can it take effect later than 12 months after the date the election is filed.
Disclaimer: This information is provided to give you a general knowledge of the subject and to allow you to have information to discuss with your attorney, CPA, or tax adviser. I am not a CPA, tax attorney, or Enrolled Agent, and I do not give tax or legal advice.
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