Question
For IRS purposes, how do I classify a domestic limited liability company (LLC)? Is it a sole proprietorship (disregarded entity), partnership, or a corporation?
Answer

A domestic 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. 
  • 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. Special rules exist for an LLC wholly owned by a married couple in a community property state, under which the LLC may be treated as a sole proprietorship (disregarded entity) notwithstanding that it has two owners; (See Revenue Procedure 2002-69 and Publication 541, Partnerships).

An LLC may elect a classification as a C corporation or an S corporation (assuming the LLC otherwise satisfies the requirements). Use Form 8832, Entity Classification Election to make an election to be a C corporation. Use Form 2553, Election by Small Business Corporation to make the election to be an S corporation. If a taxpayer doesn't file Form 2553, the default classification will apply. An eligible entity that timely files Form 2553 to elect classification as an S corporation is deemed to have made an election under Regulations Section 301.7701-3(c)(v) to be classified as an association taxable as a corporation. 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.

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