Guidance for Special Types of Businesses

Special Rules for Certain Business Structures

Special Provisions for a Limited Liability Company (LLC)

A Limited Liability Company (LLC) is a business structure allowed by state statute.

LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.

Owners of an LLC are called members. Since most states do not restrict ownership, members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit "single member" LLCs, those having only one owner. A few types of businesses generally cannot be LLCs, such as banks, insurance companies and nonprofit organizations. Check your state's requirements and the federal tax regulations for further information. For information on the kind of tax return to file, how to handle employment taxes, and possible pitfalls, refer to Publication 3402, Tax Issues for Limited Liability Companies.

An LLC can be classified for Federal income tax purposes as a partnership, corporation, or as an entity disregarded as an entity separate from its owners by applying the rules in regulations section 301.7701-3.

• Partnership: if an LLC is not treated as a corporation and has 2 or more members, it is treated as a partnership and would file a Form 1065;
• Corporation: if not a single-member LLC, and an election is made to be treated as a corporation, the LLC would file a Form 1120;
• Single owner: if a single owner, the LLC would file Schedule C or C-EZ (Form 1040).

See Form 8832, Entity Classification Election, for information on classifying an entity.

 

Important References:

Publication 3402                                         Tax Issues for Limited Liability Companies
Publication 541                                           Partnerships
Publication 542                                           Corporations
Form 1065                                                   U.S. Return of Partnership Income
Instructions for Form 1065
Form 1120                                                   U.S. Corporation Income Tax Return
Instructions for Forms 1120 and 1120-A
Schedule C (Form 1040)                           Profit or Loss from Business
Instructions for Schedule C
Schedule C-EZ (Form 1040)                     Net Profit from Business
Form 8832                                                   Entity Classification Election

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