LLC Taxation

To review, a limited liability company (LLC) is a form of business organization created by state law, designed to make life a little easier on business owners. It remains one of the most popular forms of business in the country. You can read more about LLC vs Corporations.

But because LLCs were created by state legislatures, the IRS doesn't have a specific tax classification for an LLC...there is no "LLC" tax classification.

Accordingly, the IRS will classify an LLC as one of three existing tax classifications:

LLC Tax Classifications:

  1. disregarded entity - If the LLC has only one member, it will automatically be classified as "disregarded entity". As such, an LLC owned by one individual will be taxed like a sole proprietorship where profits are reported on Schedule C of the LLC owner's personal tax return (typically Form 1040).
  2. partnership - An LLC owned by more than one owner will automatically be taxed like a partnership. A partnership is a "pass through" classification meaning the LLC will not pay federal taxes on its profits, but rather its owners will report their pro rata portion of the profits on their tax returns. Although a an LLC taxed as a partnership does not pay federal taxes, it does have to file an annual federal tax return  (IRS Form 1065).
  3. corporation (s-corp or c-corp) - An LLC has the option to be taxed like a corporation.  The corporate taxation option requires the filing of a tax election. You can read more about the C-Corp and S-Corp options below.

Does a Corporate Tax Election Turn an LLC into a Corporation?

No. The S-Corp and C-Corp elections are only relevant to federal tax returns with the IRS. For every other purpose, your business will remain an LLC (generally a less burdensome form of business than a corporation).

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Please note that tax issues are complex. We are not tax specialists. As such, we must recommend that you consult a tax professional if you have specific questions or special circumstances. According to IRS Circular 230 to ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this writing was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any matters addressed herein.