1. What is an LLC?
A limited liability company, or LLC, is a category of business entity organized in the United States under state law. An LLC can be a partnership, a corporation, or a disregarded entity, separate from its owner.
2. Who owns an LLC?
The owners of an LLC are called “members.” Most states do not restrict ownership of an LLC, so members could be:
- Other LLCs
- Foreign Persons or Entities
3. How many members can own an LLC?
There is no legal limit on how many owners an LLC can have. There isn’t usually a limit on the other end of the scale, either. Almost every state in the U.S. permits single-member LLCs.
4. Can you use an LLC for any business venture?
For the most part, yes. However, there are a few types of businesses that typically cannot be LLCs, such as banks or insurance companies. You can check your state’s specific requirements and the federal tax regulations for further information.
5. What are the default classifications of an LLC?
There are two default classifications for LLCs:
7. What exactly is a “disregarded entity?”
If an LLC has only one member, it is classified as a disregarded entity. That means that the income, deductions, gains, losses, and credits of the LLC are reported on the owner’s personal income tax return.
For example, if the owner of the LLC is an individual, the LLC’s income and expenses would be reported on one the following schedules filed with the owner’s Form 1040 or 1040NR:
8. Should a disregarded entity file any taxes? What about payroll or excise taxes?
An LLC treated as a disregarded entity should not file an income tax return. However, that does not apply to payroll, employment, or excise taxes. Regardless of the entity you are running, you must file those. If you don’t, bad things can happen!
This should help you understand the difference:
A single-member LLC is disregarded for income tax purposes, but it is considered a corporation for:
And a single-member LLC must use its own name and identification number for those purposes.
As an example, the individual owner of a single-member LLC classified as a disregarded entity isn’t an employee of the LLC. However, if the owners hires any other employees, he or she is responsible for filing payroll taxes for them.
In general, any single member with employees should determine its own liability and whether it’s responsible to file the following forms:
- Form 637, Application for Registration (For Certain Excise Tax Activities)
- Form 720, Quarterly Federal Excise Tax Return
- Form 730, Monthly Tax Return for Wagers (Section 4401 of the Internal Revenue Code)
- Form 2290, Heavy Highway Vehicle Use Tax Return
- Form 11–C, Occupational Tax and Registration Return for Wagering
- Form 8849, Claim for Refund of Excise Taxes
- Forms 940, 941, and 944 Employment Taxes
9. What happens if a single-member LLC becomes a partnership?
If a single-member LLC classified as a disregarded entity adds an additional member, it becomes a partnership under Regulations section 301.77013(f)(2).
(The only exception to this rule is the LLC has already made an election to be classified as a C or S corporation.)
If an LLC has at least two members and is classified as a partnership, that changes a few things. For example, an LLC classified as a partnership is subject to the same filing and reporting requirements as partnerships. That means that the owners must file Form 1065, U.S. Return of Partnership Income.
Another important factor to note is that only a member manager of an LLC can sign the partnership tax return, and only a member manager can represent the LLC as the tax matters partner under the consolidated audit proceedings in sections 6221 through 6234.
What is a “member manager?” A member manager is any owner of an interest in the LLC who, alone or together with others, has the continuing authority to make the management decisions necessary to conduct the business for which the LLC was formed. If there are no elected or designated member managers, each owner is treated as a member manager.
And if the number of members in an LLC classified as a partnership is reduced to only one member, it becomes an entity disregarded as separate from its owner under Regulations section 301.77013(f)(2).
10. At what point can I classify my LLC as a Corporation?
Any single-member or multi-member LLC can elect to be classified as a corporation at any point you choose.
- In order to become a C corporation, you must file Form 8832. Then, you must file income tax return Form 1120 on a yearly basis.
- In order to become an S corporation, you must file Form 2553. Then, you must you must file income tax return Form 1120-S on a yearly basis.
Note: foreign persons or entities can have ownership in or become shareholders of an LLC classified as a C corporation. However, foreign persons or entities cannot have ownership in or become shareholders of an S corporation.
11. I’ve already elected to change the classification of my LLC. Can I change it again?
Generally, once an LLC has elected to change its classification, it cannot do so again for 5 years after the effective date of the change. However, an election by a newly formed LLC that is effective on the date of formation isn’t considered a change for purposes of this limitation.
It’s also important to note that an election to change classification can have significant tax consequences based on the following transactions that are deemed to occur as a result of the election.
- An election to change classification from a partnership to a corporation will be treated as if the partnership contributed all of its assets and liabilities to the corporation in exchange for stock and the partnership then immediately liquidated by distributing the stock to its partners. See Pub 541 & 542
- An election to change classification from a corporation to a partnership will be treated as if the corporation distributed all of its assets and liabilities to its shareholders in liquidation and the shareholders then immediately contributed all of the distributed assets and liabilities to a new partnership. See Pub 541 & 542
- An election to change classification from a corporation to a disregarded entity will be treated as if the corporation distributed all of its assets and liabilities to its single owner in liquidation. See Pub 542
- An election to change classification from a disregarded entity to a corporation will be treated as if the owner of the disregarded entity contributed all of the assets and liabilities to the corporation in exchange for stock. See Pub 542
12. Are LLCs owned by a husband and wife or joint domestic partners considered a partnership under the default rule?
In most states, yes. However, this is not the case in Community Property States such as Louisiana, Arizona, California, Texas, Washington, Idaho, Nevada, New Mexico, and Wisconsin. In those, a married couple may choose to treat a business entity as a partnership or as a disregarded entity if:
- the business entity is wholly owned by the couple as a community property under the laws of a state, a foreign country, or possession of the United States;
- no person other than one or both spouses would be considered an owner for federal tax purposes; and
- The business entity isn’t treated as a corporation under Regulations section 301.7701–2. A change in reporting position will be treated as a conversion of the entity.
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