LLC Election: Everything You Need to Know
The LLC election process requires a special designation from the IRS if you want your LLC taxed as a corporation. LLC stands for Limited Liability Company.3 min read
2. LLC Election Process
3. LLC-Corporate Advantage
4. LLC-Corporate Disadvantage
5. IRS Designation
The LLC election process requires a special designation from the IRS if you want your LLC taxed as a corporation. LLC stands for Limited Liability Company, and it is a relatively new entity. It also the most flexible when compared to other entities, such as corporations.
An LLC may be taxed in several different ways, depending on the owner’s discretion. An LLC is created via state statues, and it provides members with liability protections and tax advantages. In addition, LLCs offer the flexibility of a general partnership or sole proprietorship.
An LLC is also a pass-through tax entity, where all profits and losses pass from the entity to individual members. Individual members would then file such profits and losses on their personal tax returns.
- Note: LLCs do not pay business income taxes.
LLCs prevent double taxation, which is a prime drawback of corporate entity. Under a corporation, owners not only pay business income taxes, but must also pay taxes owed on their individual tax returns. With that, LLCs provide limitations on the personal liabilities. In other words, owners cannot be held accountable for the debts and liabilities of the LLC. The personal liability feature is the main function that separates LLCs from general partnership and sole proprietorships.
LLCs may choose to be taxed as corporations instead of a sole proprietorship or partnership. The IRS does not recognize an LLC as a tax entity. If you do not choose a special tax designation, your LLC would be taxed by default in two ways:
- Single member LLCs would be taxed as a sole proprietorship
- Multi-member LLCs would be taxed as a partnership
Sole LLC members would file Schedule C and include it with their individual tax return, while multiple owners of an LLC would file an information-based return via Form 1065, including a Schedule K-1 for each member.
You may also choose other tax options for your LLC, most notably as an S corporation. An S corp uses the same pass-through tax method as an LLC.
LLC Election Process
An LLC election requires:
- Transferring all liabilities and assets to a corporation in return for corporate stock
- Distributing stock to owners during the liquidation process
Your LLC is not taxed during the LLC-corporate transfer process, assuming the following:
- The LLC’s liabilities do not surpass the bases of the assets
- The LLC may elect an S status, but only if members can retain S-corp stock
Typically, businesses choose the tax structure that permits the lowest form of taxation. Personal tax rates on partnerships and sole proprietorships at the higher end is higher than maximum corporate tax rates. For instance, if the taxable income (also known as adjusted gross income), including the business net income, is high, you may want to remove the LLC from inclusion in your individual taxes. In essence, an LLC taxed as a corporation would accomplish this. The primary benefit is that owners would not have to report all business income on his or her individual tax return.
A primary drawback of placing an LLC under C-corp classification is that your business would be subject to double taxation. This means that the LLC itself would be taxed, and you would have to file separate personal taxes on the dividends received. Therefore, the tax savings you would get from a C-corp classification should be substantial, and the double taxation should be a minor inconvenience.
Before you decide to turn your LLC into a C-corp, spend time thinking of the scenarios with a tax professional or CPA. Ensure that you make your decision on sound knowledge, and try to project the future as much as possible. Such an election is made on Form 8832, and you must submit it to the IRS. You may use Form 8832 to obtain the following tax classifications:
- Any other disregarded entity that’s different from the owners
LLCs file an election to get an association. The IRS uses the word association to mean a legal entity that’s taxable as a corporation via election. The document includes a consent form that could be signed by all LLC members, or by a single member on behalf of the other members. If a member signs, you should retain a record stating that all members agreed to the election.
For more information on an LLC election, submit your legal inquiry to our UpCounsel marketplace. UpCounsel’s attorneys will help you regarding the intricacies of turning an LLC into a C-corp classification and will let you know if such a move is right fit for your business. In addition, they will give you sound advice on keeping your business in good-standing with the IRS and state authorities.