Key Takeaways

  • An LLC can choose to be taxed as a sole proprietorship, partnership, C corporation, or S corporation depending on its structure and tax election.
  • By default, single-member LLCs are taxed as sole proprietorships and multi-member LLCs as partnerships.
  • An LLC may elect corporate taxation using IRS Form 8832 or S corporation status via Form 2553.
  • Corporations cannot elect to be taxed as partnerships, but LLCs taxed as partnerships can elect corporate status.
  • C corporation taxation offers potential benefits like retained earnings and fringe benefits but may result in double taxation.
  • S corporation taxation avoids double taxation and reduces self-employment tax but has eligibility restrictions.

An LLC electing to be taxed as a corporation is quite common, particularly for those LLCs electing to be taxed as an S corp. Since an LLC has great flexibility in terms of its management structure, it can choose to be taxed in various ways.

An LLC, or limited liability company, is authorized by state statute. Therefore, depending on the state in which you choose to register your LLC, there will be certain requirements that must be met when forming your business.

An LLC operates similarly to a corporation as it offers limited liability to its owners; this means that the owners of the business cannot be held personally liable for any money that the LLC owes to third parties. This means that their personal assets, i.e. car, home, bank accounts, etc., are protected.

If an LLC doesn’t elect to be taxed as a C corporation, then it will operate as a pass-through tax entity, meaning that all profits and losses of the business are passed through to the owners who report it on their individual income tax returns.

If the LLC elects to be taxed as a C corp, then it will need to pay corporate income taxes as well as personal income taxes for the shareholders who received dividends from the business. Therefore, the business will incur double taxation. But if the LLC elects to be taxed as an S corp, it will continue to pass the profits to the owners.

Electing Corporation Taxation

An LLC can elect to be taxed as a corporation, partnership, or sole proprietorship. Keep in mind that the Internal Revenue Service (IRS) doesn’t recognize the LLC as a taxable entity. By default, the LLC is taxed in one of two ways (depending on if you operate a single-member or multi-member LLC). If you operate a single-member LLC, then you will be automatically considered a disregarded entity and taxed as a sole proprietorship.

A multi-member LLC is automatically taxed as a partnership; the business will file an information return on Form 1065 and also draft Schedule K-1s for each member. This schedule reports how much money the member will identify on his or her personal income tax return. However, additional LLC tax options exist. Particularly, the LLC can choose to be taxed as a corporation. Remember that the LLC can be taxed as an S or C corp.

Can a Corporation Elect to Be Taxed as a Partnership?

Although corporations offer flexibility in structuring a business, a corporation cannot elect to be taxed as a partnership under IRS rules. Partnerships and corporations are distinct tax classifications, and each has different legal and operational requirements.

However, entities like limited liability companies (LLCs) have more flexibility. A multi-member LLC is taxed by default as a partnership, but it can elect to be taxed as a corporation (C corp or S corp) by filing IRS Form 8832 or Form 2553. This has led to some confusion about whether the reverse—corporations electing partnership taxation—is also possible.

To clarify:

  • Corporations cannot elect to be taxed as partnerships.
  • Only eligible entities (like LLCs) may choose partnership taxation by default or through classification elections.

The IRS's entity classification rules under the "check-the-box" regulations allow eligible business entities—such as LLCs—to choose their federal tax classification. Once an LLC elects to be taxed as a corporation, it generally cannot reverse the election for five years without IRS approval.

This distinction is important for businesses evaluating whether an LLC or corporation structure best supports their tax and operational goals.

Advantages of Being Taxed as a Corporation

There are several advantages to being taxed as a corporation, including the following:

  • Reduced taxes
  • Not having to include all profits from the business on the personal tax return
  • Reduced payroll taxes

Generally, the LLC will elect to be taxed as the type of structure that can provide for the lowest tax implications. Notably, the high-end of the personal tax rate for a sole proprietorship and partnership is even higher than a corporation. So if your taxable income, also referred to as your adjusted gross income, is high, then you should ensure that your business profits aren’t included in your personal income taxes. Therefore, having your business taxed as a corporation will provide you with a better outcome and lower tax implications.

Another benefit of having your business taxed as a corporation is the fact that not all of the business income needs to be reported on your personal tax return. In fact, S corporations can separate the owners from the business, which allows the owners to also be employees of the LLC. If the member also operates as an employee, then he or she will need to earn a reasonable compensation. The compensation paid to the member will be taxed at the personal tax rate, and will also have Social Security and Medicare taxes taken out. While such taxes are taken out, the compensation itself is not subject to self-employment taxes, which are much higher.

Disadvantages of Being Taxed as a Corporation

One of the biggest disadvantages of being taxed as a corporation is the potential for being double-taxed; this occurs only if you choose to elect status as a C corporation. Therefore, if you want to be taxed as an S corp, you will need to indicate as such.

Before you choose which type of tax election you will make, think about the benefits and drawbacks of electing tax status with each type. You could even speak to a tax professional who can assist.

Additional Considerations for LLC Tax Elections

When deciding how to have your LLC taxed, consider the following factors that go beyond basic advantages or disadvantages:

  • Eligibility Limitations: Not all LLCs qualify for S corporation status. An LLC cannot have more than 100 shareholders, and all members must be U.S. citizens or residents.
  • Administrative Requirements: Electing corporate status introduces more complexity. Corporations must follow formalities like holding regular board meetings, maintaining bylaws, and keeping minutes.
  • Profit Retention Strategy: Electing C corporation status may be beneficial for LLCs that plan to reinvest most profits into the business rather than distributing them to owners.
  • Fringe Benefits and Deductions: C corporations can deduct the cost of fringe benefits like health insurance and retirement plans, whereas S corporations have limited deductions for these expenses.
  • Exit Strategy and Growth: If the LLC plans to attract investors or eventually go public, electing corporate taxation may better align with future business plans.

Consulting a tax professional is critical to assess the long-term impact of any election on liability, compliance, and personal income.

Frequently Asked Questions

  1. Can a corporation elect to be taxed as a partnership?
    No, corporations cannot choose to be taxed as partnerships. Only certain eligible entities like LLCs can default to or elect partnership taxation.
  2. Can an LLC change its tax classification after formation?
    Yes. LLCs can file IRS Form 8832 to be taxed as a C corporation or Form 2553 to elect S corporation status, provided they meet eligibility requirements.
  3. What is the default tax status of a multi-member LLC?
    A multi-member LLC is automatically taxed as a partnership unless it elects a different status.
  4. What are the benefits of electing S corporation status for an LLC?
    S corp taxation avoids double taxation, reduces self-employment tax on dividends, and allows owners to be treated as employees with reasonable compensation.
  5. How often can an LLC change its tax classification?
    Generally, an LLC can change its classification once every five years unless there is a significant change in ownership or structure and the IRS grants permission.

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