Limited Liability Company (LLC)
Forming a Limited Liability Company (LLC)
In an LLC, owners have limited personal liability for all the debts and actions of LLC, similar to a corporation. The benefits of pass-through taxation and flexibility, much like a partnership, make LLCs a very attractive business structure. Each state may use different regulations, and you should check with your state if you are interested in starting a Limited Liability Company. Banks, insurance companies, and non-profit organizations generally cannot be LLCs. Your state may have other restrictions.
Electing an Entity Classification
Because the federal government does not recognize LLCs for federal taxation purposes, each LLC is classified differently depending on the LLCs structure. In some cases, the company can request how they would like to file the return. LLCs can only be classified as a corporation, partnership or sole proprietorship. Form 8832 is needed to classify your LLC.
A Limited Liability Company (LLC) is a business structure allowed by state statutes. LLCs are popular because they are similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.
Owners of an LLC are called members. Since most states do not restrict ownership, members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit “single member” LLCs, those having only one owner.
A few types of businesses generally cannot be LLCs, such as banks and insurance companies. Check your state’s requirements and the federal tax regulations for further information. There are special rules for foreign LLCs.
The federal government does not recognize an LLC as a classification for federal tax purposes. An LLC business entity must file as a corporation, partnership or sole proprietorship tax return.
An LLC that is not automatically classified as a corporation can file Form 8832 to elect their business entity classification. A business with at least 2 members can choose to be classified as an association taxable as a corporation or a partnership, and a business entity with a single member can choose to be classified as either an association taxable as a corporation or disregarded as an entity separate from its owner, a “disregarded entity.” Form 8832 is also filed to change the LLC’s classification.
Effective Date of Election
The election to be taxed as the new entity will be in effect on the date the LLC enters on line 8 of Form 8832. However, if the LLC does not enter a date, the election will be in effect as of the form’s filing date. The election cannot take place more than 75 days prior to the date that the LLC files Form 8832 and the LLC cannot make the election effective for a date that is more than 12 months after it files Form 8832. However, if the election is the “initial classification election,” and not a request to change the entity classification, there is relief available for a late election (more than 75 days before the filing of the Form 8832).