A Limited Liability Company (LLC) stands as a popular business structure in the United States, legally sanctioned by individual state statutes. It’s crucial to understand that regulations governing LLCs can vary from state to state. Therefore, if you’re considering forming an LLC, your first step should be to consult the specific requirements of your state.
The individuals who own an LLC are referred to as “members.” Most states maintain a flexible approach to LLC ownership, allowing a diverse range of entities to be members. This can include individuals, corporations, other LLCs, and even foreign entities. Notably, there is no cap on the number of members an LLC can have. Furthermore, the majority of states recognize and permit “single-member” LLCs, which are businesses owned by just one person.
However, it’s important to note that certain types of businesses are typically ineligible to operate as LLCs. These often include highly regulated industries such as banks and insurance companies. To confirm eligibility and understand any industry-specific restrictions, it’s essential to review your state’s regulations in conjunction with federal tax guidelines. Businesses operating as foreign LLCs also need to adhere to specific sets of rules.
LLC Classifications for Tax Purposes
The Internal Revenue Service (IRS) classification of an LLC for federal income tax purposes is not solely determined by its structure but also by elections made by the LLC itself and the number of members it has. The IRS generally categorizes an LLC as either a corporation, a partnership, or, in the case of single-member LLCs, as part of the owner’s tax return, often termed a “disregarded entity.”
Specifically, a domestic LLC with two or more members is automatically classified as a partnership for federal income tax purposes. This default classification holds unless the LLC proactively chooses to be treated as a corporation by filing Form 8832, Entity Classification Election.
For single-member LLCs, the default tax treatment is that of a disregarded entity. This means that for income tax purposes, the LLC is not considered separate from its owner. However, similar to multi-member LLCs, a single-member LLC can elect to be treated as a corporation by filing Form 8832. It’s critical to note that even when treated as a disregarded entity for income tax, a single-member LLC is still regarded as a separate entity for employment tax and certain excise tax obligations.
Electing Your LLC’s Tax Classification
LLCs that prefer not to accept their default federal tax classification, or those that wish to change their classification, must formally elect their desired classification using Form 8832, Entity Classification Election. This form is crucial for LLCs intending to be taxed as a corporation rather than as a partnership or disregarded entity.
It’s important to be aware of the timing restrictions associated with these elections. Generally, an election specifying an LLC’s classification cannot take effect more than 75 days before the filing date, nor can it be effective more than 12 months after the filing date. However, in specific situations, the IRS may grant late election relief to LLCs that missed the standard deadlines. For detailed guidance on Form 8832 and the entity classification election process, you can refer to the IRS resources available on their website, such as About Form 8832, Entity Classification Election.
