How is the Tax Treatment of an LLC Determined?

A few years ago, the IRS released a set of rules commonly referred to as the "Check-the Box Regulations."  Under these regulations, Members of an LLC can elect to have the LLC treated as a partnership, a corporation or disregarded entity for federal income tax purposes.  Ohio and most states will follow the federal classification for state income tax purposes. 

In the absence of an affirmative election, the tax treatment of an LLC is determined by applying the default classification rules contained in the regulations.  If an LLC has only one Member, and the LLC does not make an election to be taxed as a corporation, then the LLC is treated as a disregard entity (more about what that means in a future blog).  If the LLC has more than one Member, and the LLC does not make an election to be taxed as a corporation, then the LLC is treated as a partnership.   

If the Member(s) of an LLC want the LLC to be taxed as a corporation, the Member(s) file an election on IRS Form 8832.  If the Member(s) want the LLC to be taxed as an “S” corporation the Member(s) file an election on IRS Form 2553.  These elections generally need to be  made during the 12 month period before the first day of the tax year, or within 75 days thereafter.  More on how to fix an untimely election in a future blog.

Hope you found this helpful. If you like what you read, forward this to a friend and tell them to check it out by clicking on the SenneySays logo.  If something you read here raises a question, please call or email at Jsenney@pselaw.com or 937-223-1130.  Or if you really need to reach me, call my cell 937-371-4393.  I am playing golf in an event at NCR Country Club thru Saturday, but can talk before, after and between matches.

AND ONE MORE THING:  In these difficult economic time, cash flow is often very tight.  Business owners often have to make tough decisions about which bills to pay today, and which bills to pay later or not at all.  It is often very tempting for business owners to pay suppliers and employees, but put off paying taxes until later.  This can be a huge mistake.  Under federal and state tax law, taxes such as sales tax, payroll tax and income tax withholding can be collected from any "responsible party."  A responsible party is generally a business owner or officer who has the authority to make decisions concerning which creditor gets paid.  If you are a responsible party and taxes don't get paid, the IRS or state tax department can go after your house, bank account or other personal assets.  Let me know if you want to talk about this further.  Jsenney@pselaw.com or 937-223-1130.