Limited Liability Companies may face these issues.
An LLC that is not automatically classified as a corporation and does not File Form 8832 will be classified, for Federal tax purposes under the default rules.
The domestic default classification depends on whether there is one member or more than one member –
- An LLC that has one member will be classified as a “disregarded entity.” A disregarded entity is one that is disregarded as an entity separate from its owner.
- An entity that has more than one member will be classified as a partnership.
The activities of a single-member disregarded LLC owned by an individual are generally reflected on:
- Form 1040 Schedule C, Profit or Loss from Business (Sole Proprietorship) (PDF)
- Form 1040 Schedule E, Supplemental Income or Loss (PDF)
- Form 1040 Schedule F, Profit or Loss from Farming (PDF)
An individual owner of a single-member disregarded LLC that operates a trade or business is subject to the tax on net earnings from self employment in the same manner as a sole proprietorship.
If the single-member disregarded LLC is owned by a corporation or partnership, the activities of the LLC should be reflected on its owner’s federal tax return as a division of the corporation or partnership.
An LLC can elect to change its classification. Generally, once an LLC has elected to change its classification, it cannot elect again to change its classification during the 60 months after the effective date of the election. An election by a newly formed LLC that is effective on the date of formation is not considered a change for purposes of this limitation. For more information and exceptions, see Regulations section 301.7701-3(c) and the instructions attached to Form 8832, Entity Classification Election.
An election to change classification can have significant tax consequences based on the following transactions that are deemed to occur as a result of the election.
Partnership to Corporation
An election to change classification from a partnership to a corporation will be treated as if the partnership contributed all of its assets and liabilities to the corporation in exchange for stock and the partnership then immediately liquidated by distributing the stock to its partners.
Corporation to partnership
An election to change classification from a corporation to a partnership will be treated as if the corporation distributed all of its assets and liabilities to its shareholders in liquidation and the shareholders then immediately contributed all of the distributed assets and liabilities to a new partnership.
Corporation to disregarded entity
An election to change classification from a corporation to a disregarded entity will be treated as if the corporation distributed all of its assets and liabilities to its single owner in liquidation.
For more information, see Distributions to Shareholders in Publication 542, Corporations.
Disregarded entity to corporation
An election to change classification from a disregarded entity to a corporation will be treated as if the owner of the disregarded entity contributed all of the assets and liabilities to the corporation in exchange for stock.
For more information, see Property Exchanged for Stock in Publication 542, Corporations.
Special rules apply when your LLC has an operating loss:
The amount of loss you can deduct may be limited by the At-Risk Rules because of your limited liability for LLC debts.
Passive Activity Loss limitation may restrict the amount of loss you can deduct. For more information, see Publication 925, Passive Activity and At-Risk Rules.
Where to look for help:
- Tax Assistance by telephone: 1-800-829-1040
- Order forms by telephone: 1-800-829-3676
- Publication 15, Employer’s Tax Guide
- Publication 334, Tax Guide for Small Business
- Publication 541, Partnerships
- Publication 542, Corporations
- Publication 925, Passive Activity and At-Risk Rules
- Publication 1635, Understanding Your EIN (PDF)
- Form 8832, Entity Classification Election (PDF)