LLC tax classification. Four options. The right pick depends on profit and goals.
An LLC is a state-created entity. Federal tax classification is separate, determined either by default rule (based on member count) or by affirmative election. The four possible classifications produce dramatically different tax outcomes. This guide explains each, when to choose each, and the timing rules for electing or reverting.
Start here.
Default for single-member LLC. No federal entity-level return. Owner reports on Schedule C of personal 1040.
Default for multi-member LLC. Files Form 1065 (informational). Members receive K-1s reporting allocated income.
Elected via Form 2553. Owner-employees receive W-2 wages + distributions. Distributions not subject to SE tax. Eligibility: US persons only, max 100 shareholders.
Elected via Form 8832. Entity-level tax (21%) + shareholder-level tax on dividends. Required for QSBS and standard for VC-backed startups.
Election forms: 2553 (S-Corp), 8832 (C-Corp). Reverting requires waiting 60 months in some cases.
The full explanation.
Disregarded entity
Single-member LLC default. The LLC is "disregarded" for federal tax: profit/loss flows directly to the owner's personal return on Schedule C. Self-employment tax applies to all net profit (15.3% × 92.35% × net profit). Owner pays personal income tax on net profit at marginal rates. Simplest classification; no separate entity return.
Partnership
Multi-member LLC default. Files Form 1065 (informational return) at the entity level. Each member receives Schedule K-1 reporting their allocated income, deductions, credits. Members pay tax on K-1 amounts on personal returns. Active members pay SE tax on distributive share. Allocations can be disproportionate to ownership if "substantial economic effect" is satisfied. Common for multi-owner businesses.
S-Corp election
Filed on Form 2553. Effect: LLC is taxed as S-Corp for federal purposes. Owner-employees who work in the business receive W-2 wages (subject to FICA) plus distributions (not subject to SE tax). Saves SE tax on distribution portion. Requires payroll service, "reasonable compensation" analysis, and Form 1120-S annual return. Eligibility: US individuals or qualifying entities only (no non-US persons, no partnerships, no most trusts). Max 100 shareholders. Single class of stock requirement.
C-Corp election
Filed on Form 8832. Effect: LLC is taxed as C-Corp for federal purposes. Entity pays 21% federal corporate tax on profits. Distributions to owners are dividends, taxed at 15-23.8% based on bracket. Double taxation. Rarely chosen by LLCs except: (1) raising venture capital where Delaware C-Corp is investor-required; (2) planning for QSBS exclusion under Section 1202; (3) certain international structures.
Default rules
Single-member LLC: disregarded entity. Multi-member LLC: partnership. Both can elect S-Corp or C-Corp. Adding/removing members can shift default classification: single-member becoming multi-member shifts from disregarded to partnership (new EIN may be required, separate Form 1065).
Election timing
Form 2553 (S-Corp): file by 75 days into the tax year you want it effective, or any time during prior year. Late election relief available under Rev. Proc. 2013-30 for many situations. Form 8832 (C-Corp): file any time, with effective date 75 days before to 12 months after filing.
Reverting
Once you elect a classification, reverting is restricted. S-Corp reverting to default: 60-month waiting period before re-electing S-Corp. C-Corp reverting to default: may trigger deemed liquidation (taxable). Plan elections carefully.
State conformity
Most states follow federal classification. California: separate $800 minimum franchise tax for LLCs + additional fees if S-Corp elected. Tennessee: separate franchise + excise tax. Several states have unique treatment. We map your state-specific implications.
Common questions.
What is the default tax classification for an LLC?
How do I elect S-Corp treatment?
When is S-Corp election beneficial?
Can a single-member LLC elect S-Corp?
Can non-US persons own an S-Corp-elected LLC?
When does C-Corp election make sense?
Can I switch back from S-Corp to default?
Does S-Corp election affect liability protection?
Do I need a new EIN to change classification?
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This guide is educational. Specific situations require professional advice from a licensed CPA or tax attorney.
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