A limited liability company, or LLC, is a state-based hybrid business entity that combines the features of a corporation and a partnership. The IRS doesn't recognize the LLC as a business classification, however, and requires an LLC to choose how it will be taxed using one of its established classifications. A single-member LLC can choose to be taxed as a sole proprietorship or a corporation. A multi-member LLC can choose to be taxed as a partnership or a corporation. An LLC that is taxed as a corporation can make an additional election to be taxed as an S, or small business, corporation.
Fit your business needs with the right LLC package
File IRS Form 8832, Entity Classification Election, to change a single-member LLC from a sole proprietorship to a corporation, or vice versa. When a single-member LLC obtains an employer identification number, or EIN, it is automatically classified as a sole-proprietorship for purposes of the IRS. An LLC can change that classification to a corporation at any time by filing Form 8832. Alternatively, a LLC that has not obtained an EIN can make an initial classification to be taxed as a sole proprietorship or corporation by filing Form 8832. The form and instructions can be downloaded from the IRS.gov website.
File IRS Form 8832, Entity Classification Election, to change a multi-member LLC from a partnership to a corporation, or vice versa. A multi-member LLC that applies for an EIN is automatically classified as a partnership. An LLC can change that classification to a corporation by filing Form 8832 or make an initial classification using the form if an EIN has not yet been obtained. Download Form 8832 and the instructions from the IRS.gov website.
File IRS Form 2553, Election by a Small Business Corporation, to change a single-member or multi-member LLC that has chosen to be classified as a regular corporation to a Subchapter S corporation. An S corporation benefits from special tax treatment by being taxed as a pass-through entity, where business profits and losses are recorded by the stockholders rather than the business and are taxed at the individual level, as in a partnership. The form and instructions can be downloaded from the IRS.gov website.
Notify your state tax authority of any change in IRS classification. Most states have their own election form that must be filed to classify an LLC for state tax purposes. Usually, the LLC must attach the IRS determination letter that approves the entity classification to the state election form. Each state has a different procedure. Call your state tax authority directly for instructions.
Tips & Warnings
You can make a classification change at your own discretion, without providing the IRS with any reason for the change; however, after the first change to an initial classification, you can make only one classification change per 60 months.
It generally takes the IRS 60 days to approve or deny your entity classification request. The IRS will send a determination letter that should be kept as part of the LLC's business records. The change in classification is not valid until you receive an official IRS determination.
References & Resources
- Business.gov: Limited Liability Company
- IRS.gov: Limited Liability Company (LLC)
- IRS Form 8832: Entity Classification Election
- IRS Form 2553: Election by a Small Business Corporation
- FindLaw: LLC Basics
- Citizen Media Law Project: Limited Liability Company
- SCORE: Business Tools
- U.S. Small Business Administration: Small Business Planner
- ABA Family Legal Guide: Forming and Operating a Small Business
- Entrepreneur: LLC Basics
- Thinkstock/Comstock/Getty Images