Question: For IRS purposes, how do I classify a domestic limited liability company? Is it a sole proprietorship (disregarded entity), 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, 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, 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.
- 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