Entity Classification: What is it and why should I care?
Entity Classification is how you tell the IRS how to tax your LLC. You should care about your classification for a number of reasons. Your classification will dictate how you or your accountant will file your tax return for your business. Depending on which classification you choose will greatly affect your tax liability and deduction capabilities.
What are my classification choices?
When you file your newly formed LLC, depending on the number of partners you have will determine which classification the IRS will default to. If you do not do anything to classify your LLC, the LLC will default to the following tax structures.
- Single Member LLC’s will default to be taxed as a Sole Proprietor.
- A single member LLC is considered a “Disregarded Entity” to the IRS. What this means is that for liability purposes, the individual is separate from his/her company. With regards to taxation, the profits/losses are passed directly through to the individual’s personal tax return and entered on their Schedule C.
- Two or more members (Multi-Member LLC) default taxation will be classified as a Partnership.
These default taxation structures mean that the LLC will inherit the “Pass Through Taxation” that are properties of a Sole Proprietor or Partnership. The LLC itself as an entity will NOT pay taxes to the IRS, but the profits and losses of the business will be passed to the individual tax returns of the member(s). But, you can elect to be taxed as an S-Corp or a C-Corp, which requires an additional IRS form to be filled out and submitted to the IRS in your state.
- LLCs can elect to be taxes as a C-Corp – Profits and Losses from the LLC are reported on Tax Form 8832
- LLCs can elect to be taxed as an S-Corp – Profits and Losses from the LLC are reported on Tax Form 2553
To elect S-Corp Taxation, your LLC has to meet the following requirements:
- It must be a domestic company (not foreign)
- It must have no more than 100 members/shareholders
- Shareholders cannot be partnerships, corporations, or nonresident aliens
- It can have only one class of stock
- It cannot be a Bank or an Insurance Company
- All shareholders must agree to election
How soon do I have to change the entity classification of my LLC?
If you would like to change the classification of your LLC, you have 75 days from the formation of your company. If you miss that time period, you can do file it again in the first 75 days of your business’s fiscal year (can vary depending on which month you elected to have your business close in)
How do I file my entity classification?
Gov Doc Filing experts are here to take the confusion out of Entity Classification Election. Fill out our short form below and one of our filing experts will contact you via email with specific instructions on how to quickly and efficiently get your filing completed. We are here to be your one source for all your business needs. Don’t hesitate to ask questions about any additional needs for your business.