A limited liability company, or LLC, is a relatively recent development in the area of legal structures for businesses. LLCs are formed under state law, with most states having first enacted or significantly amended its LLC laws beginning in the mid-1990s. The LLC was designed to provide a business owner with the liability protection of a shareholder in a corporation and the tax advantages of a partnership. Realizing such tax advantages requires complying with the federal government's Treasury Regulations for LLCs.
The primary source for federal tax law is the Internal Revenue Code. This federal statute was first passed by Congress in 1939 and has been significantly amended several times since then, most recently in 1986. Amendments to the IRC can be anticipated every year. The next source for federal tax law is generally referred to as Treasury Regulations or federal tax regulations. This is a source of official interpretation provided by the U.S. Department of Treasury regarding the IRC found in the Code of Federal Regulations. To augment the Treasury Regulations, the IRS regularly publishes additional information regarding its practice and procedures, as well as providing official tax guidance through notices, announcements and revenue rulings.
LLC Tax Treatment
LLCs are treated as disregarded entities for federal income tax purposes, which means that they can choose their own tax status. The IRS provides Form 8832 that an LLC can file to elect to be taxed as either a corporation or partnership, or sole proprietorship in the case of a single-member LLC (see Resources). The election for tax treatment cannot take effect more than 75 days prior to filing Form 8832. It is important to note that this is only for income tax treatment; an LLC is not disregarded for employment or excise tax purposes.
Treasury Regulations permit an LLC to subsequently change its originally elected tax treatment, from a partnership or sole proprietorship to a corporation and vice versa. If the first election was made when the LLC was newly formed, the election can be made any time thereafter. If a subsequent change has already been made, the LLC must wait 60 months before electing to change its tax treatment. Also, such changes may have other tax consequences that should be considered before filing a subsequent Form 8832.
Employment and Excise Taxes
In 2007, the IRS issued a bulletin regarding Treasury Regulation changes that affected the filing procedures for single-member LLCs after January 1, 2008. Up until that time, a single-member LLC was entitled to use the member’s Employer Identification Number, which may have been a separate taxpayer identification number or the member’s SSN, for all filings with the IRS, including any employment or excise taxes filings. Starting in 2008, this is no longer possible. All LLCs, including single-member LLCs, must file for a separate EIN to be used for the LLC’s employment and excise tax filings (see Resources). If the single-member LLC does not have any employees or is not required to make any excise tax filings, the LLC can continue using the member’s taxpayer identification number or SSN.