Limited Liability Companies (LLC) are popular because, 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 a corporation, partnership or sole proprietorship tax return. Generally, if a domestic LLC has:
- Only one owner, (see Publication 555, on community property states), it will automatically be treated as if it were a sole proprietorship (an entity disregarded as separate from its owner), unless an election is made for it to be treated as a corporation.
- Has two or more owners, it will automatically be treated as a partnership unless an election is made for it to be treated as a corporation. However, if the LLC has employees, for employment tax purposes the LLC will be treated as a corporation.
If the LLC does not make a classification election, a default classification of disregarded entity (single-member LLC) or partnership (multi-member LLC) will apply. The election referred to is made using the Form 8832, Entity Classification Election. If a taxpayer does not file Form 8832, a default classification will apply. Different classification rules may apply in special situations, including banks, insurance companies, and nonprofit organizations that are LLCs.