A Limited Liability Company (LLC) is an entity created by state statute. Depending on elections made by the LLC and the number of members, the IRS will treat an LLC either as a corporation, partnership, or as part of the owner’s tax return (a disregarded entity). A domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and elects to be treated as a corporation. For income tax purposes, an LLC with only one member is treated as an entity disregarded as separate from its owner, unless if files Form 8832 and elects to be treated as a corporation. However, for purposes of employment tax and certain excise taxes, an LLC with only one member is still considered a separate entity.
The Entity Classification rules classify certain business entities as Corporations:
- A business entity formed under a Federal or State statute or under a statute of a federally recognized Indian tribe if the statute describes or refers to the entity as incorporated or as a corporation, body corporate or body politic.
- An Association under Regulations section 301.7701-3.
- A business entity formed under a Federal or State statute if the statute describes or refers to the entity as a joint stock association.
- A state-chartered business entity conducting banking activities if any of its deposits are insured by the FDIC.
- A business entity wholly owned by a state or political subdivision thereof, or a business entity wholly owned by a foreign government or other entity described in Regulations section 1.892.2-T.
- A business entity taxable as a corporation under a provision of the code other than section 7701(a)(3).
- Certain foreign entities (see Form 8832 instructions).
- Insurance Company
Generally, LLCs are not automatically included in this list, and are therefore not required to be treated as corporations. LLCs can file Form 8832, Entity Classification Election to elect their business entity classification.
Pursuant to the entity classification rules, a domestic entity that has more than one member will default to a partnership. Thus, an LLC with multiple owners can either accept its default classification as a partnership, or file Form 8832 to elect to be classified as an association taxable as a corporation.
The Form 8832 is also filed to change the LLC’s entity classification. Thus, an LLC that has been treated as a partnership for several years may be able to prospectively change its classification to be treated as a corporation by filing Form 8832.
If the LLC is a partnership, normal partnership tax rules will apply to the LLC and it should file a Form 1065, U.S. Return of Partnership Income. Each owner should show their pro-rata share of partnership income, credits and deductions on Schedule K-1 (1065), Partner’s Share of Income, Deductions, Credits, etc. Generally, members of LLCs filing Partnership Returns pay self-employment tax on their share of partnership earnings.
If the LLC is a corporation, normal corporate tax rules will apply to the LLC and it should file a Form 1120, U.S. Corporation Income Tax Return. The 1120 is the C corporation income tax return, and there are no flow-through items to a 1040 or 1040-SR from a C corporation return. However, if a qualifying LLC elected to be an S Corporation, it should file a Form 1120S, Form 1120S, U.S. Income Tax Return for an S Corporation Instructions, U.S. Income Tax Return and S corporation laws apply to the LLC. Each owner reports their pro-rata share of corporate income, credits and deductions on Schedule K-1 (Form 1120S).
For additional information on the kinds of tax returns to file, how to handle employment taxes and possible pitfalls, refer to Publication 3402, Tax Issues for Limited Liability Companies.