Can an LLC File as a C Corp?

By Tom Speranza, J.D.

Can an LLC File as a C Corp?

By Tom Speranza, J.D.

A limited liability company (LLC) is a business entity usually taxed as a partnership; it allocates all income and loss to its owners, called members, who then pay taxes on that income as part of their individual annual tax returns. An LLC taxed as a partnership does not pay income tax directly as an entity.

Woman typing on laptop at table with colleagues

Although an LLC cannot simultaneously be a corporation for purposes of a state's business entity laws, it does have the option to elect C corporation tax treatment by filing an Entity Classification Election (Form 8832) with the U.S. Internal Revenue Service (IRS).

Unlike an LLC taxed as a partnership, an LLC taxed as a C corporation pays income tax directly; the entity itself is the taxpayer, and the corporate tax rates apply instead of the individual rates. If an LLC has elected C corp. tax treatment, the members pay taxes only on the LLC income they receive in the form of salary and dividends.

Filling Out Form 8832

The Entity Classification Election is relatively simple to complete for an LLC electing C corp. tax treatment:

  1. Provide basic information about the LLC: full name of the entity, its employer identification number, and the address of its principal place of business.
  2. Answer whether the LLC is making the election as an initial classification in connection with the LLC's formation or if the LLC is changing from partnership to corporation taxation after operating for a period of time.
  3. Check Item 6a for "a domestic eligible entity electing to be classified as an association taxable as a corporation."
  4. Choose an effective date for the election.
  5. Provide a contact name and phone number for the IRS.
  6. Have an authorized person who can sign for the LLC as an entity (such as a manager or officer) sign the Consent Statement.
  7. Have all current members of the LLC sign the Consent Statement.

If you have questions about the Entity Classification Election, the IRS provides instructions as part of Form 8832.

Other Tax Forms

An LLC taxed as a C corporation files a U.S. Corporation Tax Return (Form 1120) and does not pass its income or loss to members. Because the members of an LLC taxed as a partnership are legally prohibited from also being employees of the LLC, an LLC electing C corporation taxation typically employs its members as salaried employees and issues to them annual Wage and Tax Statements (Form W-2).

If an LLC taxed as a corporation pays dividends during a tax year, the total amount is reported to the members on a Dividends and Distributions statement (Form 1099-DIV), and the members include them on Interest and Ordinary Dividends schedules (Schedule B) attached to their individual tax returns.

Reasons to Choose C Corporation Tax Treatment

Although it is not very common for LLCs to choose C corp. taxation, there are some situations when electing corporate tax treatment makes sense for an LLC's members:

Simpler Taxes for Employees

Being a W-2 employee means you don't pay taxes directly on your compensation; the LLC withholds and pays the federal, state and local taxes on employee salaries (along with the withholding amounts for Social Security, Medicare and unemployment insurance) each time it issues paychecks.

Companies taxed as corporations can usually issue W-2 forms to employees earlier in the year than companies taxed as partnerships can issue Schedule K-1s (Form 1065) to partners (corporations, for example, do not need to wait until they complete their corporate taxes before issuing W-2s).

Owners of partnerships are subject to IRS limits on the amount they can deduct for the following benefits:

  • Life insurance
  • Medical insurance
  • Child care
  • Education
  • Retirement plans

C corp. owner-employees don't have these same limitations, and the LLC can often pay for these benefits on behalf of the employees.

A Lower Overall Tax Bill

Because the personal tax rates at the higher end of the income scale are more than the corporate tax rates, an LLC and its members might realize an overall tax savings by electing C corporation taxation. Paying out a portion of the LLC income as salary (taxable at the personal rates) and retaining the remainder in the LLC (taxed at the corporate rates) could be more tax efficient than the partnership requirement to allocate all LLC income to the members.

An online legal services provider can help you consider the pros and cons of electing C corporation tax treatment for your LLC.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.