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Articles on
LLC Formation
Arizona
Law
Arizona
LLC Library
Elect
LLC's Form of TaxationElect the LLC's Form of Federal Income Taxation
by Richard Keyt, Arizona business attorney
One of the major reasons to form a limited liability company is that the LLC may chose how it will be taxed for federal income tax purposes. Subject to certain limitations, an LLC may be classified for federal income tax purposes as: (i) a sole proprietorship, (ii) a partnership, (iii) a C corporation, or (iv) an S corporation. Whether an LLC can select a particular federal tax classification depends on the number and type of members.
A single member LLC may elect to be classified as a sole proprietorship, a C corporation or an S corporation. Multi-member LLCs may elect to be taxed as a partnership, C corporation or S corporation. The LLC, however, may not elect to be taxed as an S corporation unless it meets all requirements applicable to S corporations. If the LLC does not elect its classification by filing IRS Form 8832 (pdf), the IRS assigns a default classification of partnership (for multi-member LLCs) or sole proprietorship (for single member LLCs).
Even thought it is owned by two members, an LLC that is owned solely by a husband and wife as community property may be taxed as a sole proprietorship or as a partnership. The couple may elect either form of taxation. IRS Revenue Procedure 2002-69 states that the IRS will accept the married couples' choice to be taxed as a sole proprietorship or as a partnership.
In general, the difference between being taxed as a corporation and being taxed as a partnership is that partnerships are not taxpaying entities and corporations (other than S corporations) are. The profits, losses and other tax items of an LLC taxed as a partnership are passed to the members of the company prorata according to their ownership and included on the members' federal income tax returns. By electing to be taxed as a partnership for federal income purposes, a multi-member company can avoid the double tax that can occur with a corporation when the corporation has taxable income.
The LLC may elect to be taxed as a partnership or as a corporation for federal tax purposes by filing IRS Form 8832 (pdf), Entity Classification Election. For more information, see IRS Publication 542 (pdf), Corporations, and IRS Publication 541 (pdf), Partnerships.
Before electing how your Arizona LLC will be taxed, you should consult with your accountant because the election will have significant economic consequences. Facts and circumstances applicable to each new Arizona LLC will influence the taxation election that is best. An erroneous tax election can be very expensive.
About the Author
Richard Keyt, J.D., LL.M. (income taxation New York University Law School) is a business, real estate, transactions, contracts and estate planning attorney licensed to practice law in Arizona. He has formed over 1,600+ Arizona limited liability companies in the last few years because his low cost high quality LLC package is second to none and it only costs $599 for everything. Rick has practiced law in Arizona since 1980. Rick can be reached by telephone at 602-906-4953, ext. 101. Email at rickkeyt@keytlaw.com and fax at 602-297-6890. Rick's web site located at www.keytlaw.com had over 1,000,000 visitors in 2006 and 2007. Rick does not accept matters involving landlord / tenant disputes or litigation of any kind (other than tax lien foreclosures). Communicating with Richard Keyt via email or otherwise does not cause you to become a client or cause your communications to be confidential or subject to the attorney client privilege.
KEYTLaw LLC Formation Records: day: 17 (6/4/08); week: 27 (week ending 6/7/08); month: 64 (6/08); year: 425 (2007)
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This page was last modified on April 10, 2008.
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