Default Taxation for an LLC
A limited liability company (LLC) is not recognized by the IRS as a taxing entity. So an LLC pays income taxes based on the membership structure of the company:
- A single-member LLC is considered a disregarded entity, and pays income tax as a sole proprietorship, through the member's personal tax return.
- A multiple-member LLC pays income taxes as a partnership.
LLC Taxed as Corporation
An LLC can also elect to pay income tax as what the IRS calls "an association taxable as a corporation." This election is made on IRS Form 8832. Here are some things you need to know about this election:
- The form allows "eligible entities" to file this election. LLCs are specifically stated to be eligible entities.
- 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 for multiple member LLC).
Effect of the Election
You should know the effect of this election on your taxes. Here is what the IRS says about the effect:
- If your multiple member LLC is classified as a partnership, it is deemed by the IRS that the partnership contributes all of its assets and liabilities to the association in exchange for stock in the association, and immediately thereafter, the partnership liquidates by distributing the stock of the association to the partners.
- If you are a disregarded entity and you elect to be classified as an association (corporation), you are deemed to have contributed all the assets and liabilities of the entity to the association in exchange for the stock of the association.
When to File
The election to be taxed as the new entity will be in effect on the date the LLC enters 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. There are other rules for filing this form for new businesses; check with your tax adviser for the timing of this filing.
The IRS will send you a letter notifying you if your election has been accepted.
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