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Entities

Question: For IRS purposes, how do I classify a domestic limited liability company? Is it a sole proprietorship, partnership or a corporation?

Answer:

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, the IRS will by default treat it as if it were a sole proprietorship (disregarded entity) unless the owner makes an election to have it 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, the IRS will by default treat it as a partnership unless the entity makes an election to have it treated as a corporation.

Either one of these entities may elect a classification as a standard corporation. Use Form 8832 (.pdf), Entity Classification Election, to make this election. If a taxpayer does not file Form 8832, the default classification will apply. Different classification rules may apply in certain situations for certain types of businesses, including: banks, insurance companies and nonprofit organizations that are also organized as an LLC.

Note: If an LLC that is otherwise disregarded has employees, the law treats it as an entity separate from its owner for reporting and payment of employment taxes.

Additional Information:


Category: Small Business, Self-Employed, Other Business
Subcategory: Entities: Sole Proprietor, Partnership, Limited Liability Company/Partnership (LLC/LLP), Corporation, Subchapter S Corporation

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The OMB number for this study is 1545-1432.
If you have any comments regarding this study, please write to:
IRS, Tax Products Coordinating Committee
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1111 Constitution Avenue NW
Washington, DC 20224