by Attorney William Bronchick
By default, a limited liability company is treated under the federal tax rules as a partnership if it has two or more owners (”members”). If it has one member, it is “disregarded” for Federal income tax purposes, (Treas. Reg. Sec 301.7701-3(b)(1)). As a disregarded entity, the LLC income would be reported on the sole member’s tax return. Thus, if it were active income, it would be reported on schedule C, as rental income on schedule E, etc.
A limited liability company can elect to be treated as a corporation rather than a partnership or disregarded. If you want your LLC or partnership to be treated as such, you can file IRS form 8832, Entity Classification Election. In theory, this could be a “lazy man’s” corporation; it will be treated as a corporation for Federal income tax purposes, without the paperwork formalities of a corporation as required by state law. It could even file an S election using form 2553.
One of the advantages of using an LLC instead of a corporation is the built-in asset protection feature afforded by LLCs. A judgment creditor of a member may not, under state, attach assets owned by the LLC, but rather is limited to a “charging order” (assignment of the member’s income only). Due to a recent Federal Bankruptcy Court decision (In Re Ashley Allbright), it’s not clear whether a single member LLC will still have such protection, so clearly the multiple-member LLC would give better asset protection than a single-member LLC. This is discussed in more detail in my LLC home study course.
The only drawback is that the IRS may still require extensive documentation and corporate formalities for aggressive tax deductions. A Corporation would normally have these formalities, such as annual minutes of meetings, special meetings and resolutions. LLCs are not generally required to have these formalities under State law. However, the IRS is not bound by state law, so theoretically your LLC-taxed-as-corporation could be in trouble if you got audited and had no resolutions!
Thus, if you want the tax benefits of a corporation, you should probably form a regular corporation. If you form an LLC and elect to be taxed as a corporation, be sure to complete the regular formalities that a corporation would normally do, such as resolutions, minutes of meetings, etc.
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