Tax Information for Limited Liability Companies
March 17, 2005
The Limited Liability Company (LLC) is a business structure that is increasing in popularity. This business entity is a state created legal entity and as such has a separate legal existence. Therefore, personal assets are kept separate from business assets and are not reachable by corporate creditors with claims against the LLC.
Each state has its own registration and business requirements for an LLC. LLCs have a variety of names and level of asset protection. There is no Federal tax return specifically for the LLC; instead the rules for LLC’s will determine which Federal tax return they file.
So what type of federal tax return should an LLC file? For Federal tax purposes, an LLC business must file either a corporate, partnership or sole proprietorship tax return.
Federal tax laws will automatically classify and tax certain LLC business entities as corporations. These entities are:
· A business entity formed under a Federal or State statute or under a statute of 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 of 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).
· An Insurance Company.
An LLC that has at least two members can choose to be classified as either a partnership, or an association taxable as a corporation. A business entity with a single member can choose to be classified as either an association taxable as a corporation or as a disregarded entity which is an entity disregarded as separate from its owner. If the LLC does not choose how it wants to be classified, the entity will default to a pre-determined classification for Federal tax purposes. If the LLC has at least two members, and is not required to file as a corporation, it will default to a partnership classification and be required to file a partnership tax return. An LLC with only one member and that is not required to file as a corporation, will default to the disregarded entity status and be required to file as a sole proprietor and complete the required schedules as part of the single member owner’s 1040.
For a variety of business reasons an entity may wish to be classified as something other than its default category. To do this, or to change its current classification, an entity must file Form 8832, Entity Classification Election. The election to be taxed as the new entity will be in effect on the date the entity enters on line 4 of Form 8832. If the entity does not enter a date on Line 4, the election will be in effect as of the date the form is filed. Additionally, the election can not take place more than 75 days prior to the filing date for Form 8832 nor can the election effective for a date that is more than 12 months after Form 8832 is filed. However, if the election is the “initial classification election”, and not a request to change the entity classification, there is relief available for a late election (more than 75 days before the filing of the Form 8832). See the instructions for Form 8832. which are attached to the tax form
Many of the rules for making the election for an entity to changes its classification are in the instructions for Form 8832 which are attached to the tax form. These instructions include information on how a newly formed entity may be eligible to make an election to classify itself as something other than its default category even it has passed the deadline to make such an election.
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For additional tax information, please visit the IRS website at www.irs.gov.