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How are LLCs treated by the IRS?

| Apr 13, 2022 | Business Formation |

Residents and new businesses in North Texas may want to learn more about how a Limited Liability Company (LLC) is viewed by the Internal Revenue Service (IRS).

According to the IRS, each state has different regulations regarding this type of business structure.

What is an LLC?

An LLC is composed of members. The members generally may be individuals, corporations, other LLCs and foreign entities. Some states also allow the LLC to have just one member, the owner. There is normally no maximum number of members of this type of business.

What is the IRS classification?

The IRS says that an LLC may be treated (taxed) as either a corporation, a partnership, or as part of the LLC’s owner’s tax return (when treated as part of the owner’s tax return, the LLC is referred to as a “disregarded entity”). For federal income tax purposes, in the U.S., an LLC of two or more members is automatically classified as a “partnership” for tax purposes.

What is Form 8832?

IRS Form 8832 (Entity Classification Election) allows a choice in how the LLC is to be treated for federal income tax purposes. For example, the LLC can choose to be taxed as a corporation. A one-member LLC normally receives tax treatment as an entity that is not separate from its owner. This member may, however, choose to file Form 8832 for treatment as a corporation. On the other hand, a business with one member is considered as a separate entity when it comes to employment tax and certain excise taxes.

Changes in classification

Maybe when the business formation happened, you were not clear on the classification by the IRS. You may want to change from the default federal tax classification. Form 8832 will allow you to do this; however, it cannot take effect more than 75 days prior to its filing. It can also not take effect later than 12 months after its filing.

There is some flexibility in the way that the IRS treats an LLC. This flexibility included the LLC filing Form 8832 for tax purposes.