Question: For IRS purposes, how do I classify a domestic limited liability company? Is it a sole proprietorship, partnership or a corporation?
A domestic limited liability company (LLC) is an entity:
- Formed under state law by filing articles of organization as an LLC.
- Where none of the members of an LLC are personally liable for its debts.
For federal income tax purposes, an LLC may be classified and taxed as a sole proprietorship (single member), partnership (multi member), or a corporation (single or multi member).
Generally, if a domestic LLC has:
- Only one owner, it will automatically be treated as if it were a sole proprietorship (disregarded entity) unless an election is made for it to be treated as a corporation. Special rules exist for residents of community property states, where the Qualified Joint Venture rules may apply (as referenced in Publication 541, Partnerships).
- Two or more owners, it will automatically be treated as a partnership unless an election is made for it to be treated as a corporation.
Either one of these entities may elect a classification as a standard corporation. This election is made using Form 8832 (PDF), Entity Classification Election. If a taxpayer does not file Form 8832, the default classification will apply. Different classification rules may apply in certain situations, including: banks, insurance companies, and nonprofit organizations that are also organized as an LLC.
Note: For employment tax purposes, if an LLC that is otherwise disregarded has employees it will be treated as an entity separate from its owner for reporting and payment of employment taxes.
- Publication 542, Corporations
- Tax Topic 103, Tax Help for Small Businesses and the Self-Employed
- Publication 3402 (.pdf) Taxation of Limited Liability Companies
- Publication 334, Tax Guide for Small Business
Category: Small Business, Self-Employed, Other Business
Subcategory: Entities: Sole Proprietor, Partnership, Limited Liability Company/Partnership (LLC/LLP), Corporation, Subchapter S Corporation