LLC Tax Classification: What it is and How to get it

LLC tax classification is the way you choose your LLC entity taxing structure. LLC is short for limited liability company. There are folks who think LLC Tax Classificationthat LLC is short for Limited Liability Corporation, but that’s not right. An LLC is not a corporation, but a company. An LLC does offer the same corporate shield protection as a corporation. In addition, the LLC offers another type of asset protection called “charging order” protection.

An LLC tax classification requires that you file paperwork with the state where you form the LLC and also file your tax election with the IRS. At that time, you can elect your LLC tax classification or how your new business will be viewed by the IRS for tax purposes. If your LLC is a single member LLC (one owner) then you can tax it as a “disregarded entity” and simply file a schedule C on your 1040 tax return. If your LLC has two or more members you can choose to be classified as either a corporation or a partnership. If you elect to be a corporation you can also choose to have it taxed either a C or S corporate tax structure.

LLC Tax Classification C or S

If you choose to have a LLC tax classification as a C corporation structure, you should file a Form 8832 to elect your LLC’s tax classification. On the other hand, if you choose to be taxed as an S corporation, file a form 2553. If you fail to file any tax forms, your LLC will be classified, under the IRS default rules, as either a sole proprietorship or a partnership if there are two or more members. The sole proprietorship will automatically default to the classification as a disregarded entity.

The LLC tax classification under a specific tax code section doesn’t affect the asset protection of the LLC entity. People often ask, “What is an LLC entity classification?” They often confuse asset protection with the tax issues. An LLC is an LLC for asset protection purposes, but it can be any one of the above listed tax entity structures for tax purposes.

The LLC entity classification is one of a small businessman’s best asset protection tools, and it is definitely one of the most flexible tax tools, because you can choose any tax structure you want. When forming an LLC it may be a good idea to check with your accountant and review your type of business and its potential operations, so you can pick the best entity for your business. My LLC Wizard Course also details all the options with a full chapter on Tax Decisions, complete with audio explanation.


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