LLC tax organizer: settle the tax classification first

An LLC is a company created under state law, with members as its owners. The IRS treats it as a corporation, a partnership or part of its owner’s return, depending on its elections and its number of members (IRS, Limited Liability Company (LLC)). So two LLCs with the same name on the state certificate can file completely different federal returns.

By default, a domestic LLC with at least two members is a partnership (IRS, Limited Liability Company (LLC)). An LLC with only one member is disregarded as separate from its owner (IRS, Limited Liability Company (LLC)). In plain terms, a disregarded entity is an LLC whose income and expenses go on its owner’s return, as if it did not exist for income tax. Either default changes if the LLC files Form 8832 and elects to be taxed as a corporation (IRS, Limited Liability Company (LLC)).

The word organizer is ambiguous here. In state law, an LLC organizer is the person who signs and files the articles of organization that create the LLC. This page is about the other kind: the tax questionnaire a preparer sends before the return.

Once the members and elections are known, the rest of the work moves to the organizer for that return. A one-member LLC owned by an individual reports a business on Schedule C, a rental on Schedule E or a farm on Schedule F (IRS, Single member limited liability companies). The small business tax organizer has the full table of entity types and returns.

What this page adds is the election history, because a missed deadline is common with LLCs. An owner may believe the LLC is an S corporation when Form 2553 was never filed, or filed late. Late filings are not always lost: both forms have a relief route, and each has conditions the preparer checks before relying on it.

The state side has its own bill. For example, California charges an annual tax of $800 to every LLC doing business or organized there (California Franchise Tax Board, Limited liability company). So the organizer asks for the state filing receipt, not only the federal letters.

Form 8832 is how an LLC refuses its default classification or changes it (IRS, Limited Liability Company (LLC)). The organizer asks for the IRS letter and the effective date, because a mid-year change can split the year between two returns.

Form 8832 itself asks whether the entity made an election with an effective date within the last 60 months (Form 8832, Entity Classification Election). That is why the organizer asks about past elections, not only this year’s.

An LLC that wants S status files Form 2553. An entity that meets the tests in those instructions is treated as a corporation from the date of the S election and does not need to file Form 8832 (Instructions for Form 2553).

The member count is a tax fact, not just a legal one. Because the default for two or more members is a partnership, a one-member LLC that admits a second member during the year no longer fits the disregarded default (IRS, Limited Liability Company (LLC)). The date of the change matters, and so does the price paid for the new interest.

The reverse happens too, for example when a two-member LLC buys out one member. In that case the remaining owner may end up with a one-member LLC. In both cases, the organizer asks for the agreement and the date, and the preparer works out what each part of the year files.

A disregarded LLC is still a separate entity for employment tax and certain excise taxes (IRS, Single member limited liability companies). It must use its own name and EIN to report and pay employment taxes (IRS, Single member limited liability companies). For income tax information returns, such as a Form W-9 it gives a customer, a disregarded LLC owned by an individual generally uses its owner’s SSN or EIN (IRS, Single member limited liability companies).

Whatever the classification, every LLC answers the same short block: legal name, EIN, state and date of formation, the operating agreement, members and percentages, year-end statements, Forms 1099 received and issued, and assets bought or sold. Each owner who is a person also needs the individual tax organizer for the rest of their return.

• IRS, Limited Liability Company (LLC): Default classification by number of members, Form 8832 to elect or change, and the 75-day and 12-month limits on an election’s effective date.
• IRS, Single member limited liability companies: A disregarded LLC owned by an individual reports on Schedule C, E or F, uses its own EIN for employment taxes, and its owner’s number for income tax information returns.
• IRS, LLC filing as a corporation or partnership: An LLC taxed as a C corporation files Form 1120 with nothing flowing to Form 1040, and an LLC with an S election files Form 1120-S.
• Form 8832, Entity Classification Election: The form asks whether the entity made an election with an effective date within the last 60 months; late election relief needs reasonable cause and a request within 3 years and 75 days of the requested effective date.
• Instructions for Form 2553: Form 2553 is generally filed within 2 months and 15 days of the start of the tax year; an eligible entity that meets the tests is treated as a corporation from the S election date without Form 8832; late elections follow Rev. Proc. 2013-30.
• California Franchise Tax Board, Limited liability company: Every LLC doing business or organized in California must pay an annual tax of $800.