LLC elections impact taxation specifics

On Behalf of | Aug 3, 2020 | Business Formation

State statutes in California and across the country allow for the formation of different types of business entities, including limited liability companies. The owners of a limited liability company are referred to as members. Ownership is generally not restricted, so an LLC’s owners might include corporations, other LLCs or individuals. Most states allow LLCs with only one owner, and there is no limit on the number of members an LLC might have. The way these entities are taxed at the federal level depends in part on the specific elections made by the company.

Depending on these factors, the federal Internal Revenue Service will treat an LLC as a corporation, partnership or disregarded entity. A disregarded entity is not treated as independent for tax purposes, and income from a disregarded LLC is generally simply reported on the owners’ tax returns. For purposes of LLC income tax, a single-member LLC is disregarded unless the company files IRS Form 8832.

LLCs that have only one member are still regarded as separate entities when it comes to employment taxes and some excise taxes. An LLC that wants to change its federal tax classification uses Form 8832 to make an election regarding how it will be taxed. Usually, an LLC’s classification election cannot be made effective more than 75 days before the election filing date.

Entrepreneurs and business owners in California might want to schedule a meeting with an attorney to discuss the various business entities and structures available. Depending on the specifics of the business and the goals of ownership, an attorney might be able to help by drafting and filing necessary establishment documents or by communicating with government agencies on the client’s behalf. Running a business as an LLC or a corporation could provide the owners with tax advantages, liability protection or other benefits.



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