Tax Choices for
the Virginia LLC
One of the reasons the Virginia
LLC is the most popular legal entity for small business is because
the LLC gives business owners the most tax choices over any other
legal entity when it comes to federal income taxation. This
Article summarizes the tax choices and then gives links to helpful
resources.
The Single Member
LLC Has Three Tax Choices
A single member LLC has the
choice of
(i) Being disregarded as a separate entity for tax purposes;
(ii) Being taxed as a C corporation; or
(iii) Being taxed as an S corporation if the LLC and the Member
meets the
S corporation rules.
The default tax rule is to be
disregarded and taxed as a sole proprietor. In this case, the
LLC's income is taxed on the single member's own personal tax
return. You will report the LLC income on Schedule C of the
Form 1040. If you prefer this method of taxation for your LLC,
your LLC does not have to file any tax choice form when it is
formed.
Remember, this is only a tax
classification, the single member LLC is definitely recognized as an
entity separate and apart from the single member LLC for all other
purposes which means you still get the benefit of legal liability
protection.
If a single member LLC wants to
be taxed as a C corporation, the LLC will need to file IRS Form 8832
no later than 75 days from formation of the LLC. If the
single member LLC wants to elect S corporation status and as a
result be taxed under the partnership tax rules, the LLC will have
to file IRS Form 2553 (known as the S Election Form).
If your LLC is taxed as a C
corporation, the income tax return to be filed is the Form 1120. If your
LLC is taxed as an S Corporation, the tax return Form 1120S is filed.
The Multi-Member
LLC Has Three Tax Choices
A multi-member LLC
also has three tax choices:
(i) Taxed under the partnership tax rules (known as a single layer
of taxation);
(ii) Taxed as a C corporation; or
(iii) Taxed as an S Corporation if the LLC and its Members meet the
S corporation rules.
The default rule
is the partnership tax structure. In this case, the LLC will
file an informational return with the IRS (Form 1065). The LLC
will be required to give each LLC Member a K-1 tax form for
each tax year. Then each LLC Member will report the LLC's
income and losses on his/her own tax return.
The tax election
requirements for a multi-member LLC desiring corporation tax status
is the same as for a single member LLC. If a multi-member LLC
wants to be taxed as a C corporation, the LLC
will need to file IRS Form 8832 no later than 75 days from
formation of the LLC.
If the multi-member LLC wants to
elect S corporation status and as a result be taxed under the
partnership tax rules, the LLC will have to file IRS Form 2553
(known as the S Election Form) and this must be filed no later than
75 days from formation of the LLC. Otherwise, you will have to
wait until the following tax year before electing.
If your LLC is taxed as a C
corporation, the income tax return your LLC will file is Form 1120. If your
LLC is taxed as an S Corporation, the Form 1120S is filed.
S Corporation
Status Has Strict Requirements
If your LLC is contemplating an
S corporation tax status, it is important to know that your LLC and
its Members must meet the same requirements that a corporation must
have before qualifying for S corporation status.
The major requirements are:
-
The LLC must have less than
100 Members
-
All Members are required to
be individuals (some trusts and estates can qualify but a Member
cannot be a corporation or another LLC)
-
All Members must be US
citizens of permanent residents
-
There can only be one class
of Membership Interests
-
The tax year should
generally be the calendar year
Many small businesses will meet
the requirements but it is important you review the requirements
(included in the Instructions to Form 2553 below) or seek the advice
of your accountant.
Tax Resources
8832 Entity Classification Election
2553 Election by a Small Business Corporation
Instructions for Form 2553
