{"id":2930,"date":"2010-09-13T14:16:36","date_gmt":"2010-09-13T21:16:36","guid":{"rendered":"http:\/\/www.keytlaw.com\/azllclaw\/?page_id=2930"},"modified":"2021-01-01T15:21:59","modified_gmt":"2021-01-01T22:21:59","slug":"llc-tax-methods","status":"publish","type":"page","link":"https:\/\/www.keytlaw.com\/azllclaw\/forming-llcs\/llc-tax-methods\/","title":{"rendered":"How are LLCs Taxed?"},"content":{"rendered":"<p style=\"text-align: justify;\">by Arizona LLC Attorney and former CPA <a href=\"http:\/\/www.keytlaw.com\/attorneys-staff\/richard-c-keyt\/\" target=\"_blank\" rel=\"noopener noreferrer\">Richard C. Keyt<\/a><\/p>\n<h1 style=\"text-align: justify;\">An Explanation of the Four Ways LLCs Can Be Taxed<\/h1>\n<p style=\"text-align: justify;\">One of the advantages to forming an LLC is that it allows maximum flexibility for choosing a method of federal taxation.\u00a0 For instance, if an individual formed a limited partnership, the limited partnership must be taxed as a partnership.\u00a0 Whereas, an individual who forms a corporation must be taxed as either a C Corporation or S Corporation.\u00a0 However, the individual, who forms an LLC, has the whole panacea of federal tax alternatives to choose from.\u00a0 The individual may elect to be taxed as a partnership, taxed as a C Corporation, taxed as a S Corporation, or a sole proprietorship (if the LLC is a single member LLC).\u00a0 This article discusses the various methods of LLC taxation and some of the pros and cons of each method of taxation.<\/p>\n<p><center><iframe src=\"https:\/\/www.youtube.com\/embed\/qne2Hstp2i4\" width=\"560\" height=\"315\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/center><\/p>\n<p style=\"text-align: justify;\"><strong>The Check The Box Regulations<\/strong><\/p>\n<p style=\"text-align: justify;\">Before discussing the four different methods of federal income taxation available to LLCs, it is important to discuss the tax implications upon forming a LLC.\u00a0 When the LLC is initially formed, federal tax law creates a default manner of taxation for the LLC based upon the number of members the LLC has.\u00a0 The default classification for a single member LLC, whose sole member is an individual, will be classified as a sole proprietorship.\u00a0 The default classification for a single member LLC, whose sole member is a corporation or partnership, will be classified as a disregarded entity for federal income tax purposes.\u00a0 A multi-member LLC will have a default classification as a partnership.<\/p>\n<p style=\"text-align: justify;\">These default classifications are important, because if the member(s) wish to change the federal tax classification of the entity, then they must file an <a href=\"http:\/\/www.irs.gov\/pub\/irs-pdf\/f8832.pdf\" target=\"_blank\" rel=\"noopener noreferrer\">IRS Form 8832<\/a>.\u00a0 If the newly formed LLC does not file this form, the default classification would apply to the newly formed LLC.\u00a0 Further, if a newly formed LLC wishes to be taxed as an S-Corporation, it must file an <a href=\"http:\/\/www.irs.gov\/pub\/irs-pdf\/f2553.pdf\" target=\"_blank\" rel=\"noopener noreferrer\">IRS Form 2553<\/a> in lieu of <a href=\"http:\/\/www.irs.gov\/pub\/irs-pdf\/f8832.pdf\" target=\"_blank\" rel=\"noopener noreferrer\">Form 8832<\/a>.<\/p>\n<p style=\"text-align: justify;\">Note the time restrictions on each form.\u00a0 Form 8832 does not have to be filed immediately and may be filed at any time during the entity&#8217;s existence subject to certain limitations.\u00a0 The instructions to Form 8832 provide that an election will not be effective 75 days before the election is filed.<\/p>\n<p style=\"text-align: justify;\"><strong>Sole Proprietorship<strong> Method of Federal Income Taxation<\/strong><\/strong><\/p>\n<p style=\"text-align: justify;\">A sole proprietorship is the default classification for a single member LLC.\u00a0 Only a single member LLC may be taxed as a sole proprietorship.\u00a0 A sole proprietorship does not have to file any separate tax returns, and is a disregarded entity for federal income tax purposes.\u00a0 The member of the LLC reports all the economic activity of the LLC on their personal income tax return on <a href=\"http:\/\/www.irs.gov\/pub\/irs-pdf\/f1040sc.pdf\" target=\"_blank\" rel=\"noopener noreferrer\">Schedule C<\/a>.\u00a0 The taxpayer then pays any tax associated with the LLC on their personal income tax return.<\/p>\n<p style=\"text-align: justify;\">A major advantage to having an LLC taxed as a sole proprietorship is the ease of reporting the income or loss of the LLC.\u00a0 The sole proprietorship does not need to file an additional tax return unlike the C Corporation, S Corporation, or partnership.\u00a0 This is advantageous because the LLC does not have to prepare a balance sheet and other schedules which may be required on the tax returns for the other methods.\u00a0 This allows many small business owners to focus more time and money on their business, rather, than having to pay an accountant or prepare the additional tax forms themselves.<\/p>\n<p style=\"text-align: justify;\">There are two major disadvantages to the sole proprietorship.\u00a0 The first disadvantage is that taxpayer&#8217;s who file <a href=\"http:\/\/www.irs.gov\/pub\/irs-pdf\/f1040sc.pdf\" target=\"_blank\" rel=\"noopener noreferrer\">Schedule C<\/a> tend to get audited at a higher rate than taxpayers who do not.\u00a0 The higher audit ratio means members must be especially diligent in maintaining documentation supporting any deductions they claim associated with the LLC.\u00a0 This means keeping receipts and other supporting items for at least 3 years after the return has been filed.\u00a0 If the member fails to do so, the IRS may disallow many deductions during an audit and the taxpayer may be faced with a substantial tax bill.<\/p>\n<p style=\"text-align: justify;\">The second major disadvantage associated with sole proprietorship taxation is that the member must pay self employment tax.\u00a0 An employee pays <a href=\"http:\/\/www.ssa.gov\/oact\/progdata\/taxRates.html\" target=\"_blank\" rel=\"noopener noreferrer\">6.2% for social security<\/a> on the first $106,800 of wages and <a href=\"http:\/\/www.ssa.gov\/oact\/progdata\/taxRates.html\" target=\"_blank\" rel=\"noopener noreferrer\">1.45% for medicare<\/a> on all wages.\u00a0 Self employment tax is similar to payroll taxes (social security and medicare) paid by employees.\u00a0 The key difference is that the member of the LLC must also pay the employer&#8217;s portion of social security and medicare.\u00a0 Generally, self employment tax is calculated by taking the sole proprietor&#8217;s net earnings from self-employment which includes any allowable business deductions.\u00a0 The LLC member pays <a href=\"http:\/\/www.ssa.gov\/oact\/progdata\/taxRates.html\" target=\"_blank\" rel=\"noopener noreferrer\">12.4% for social security<\/a> on the first $106,800 of net self employment earnings and <a href=\"http:\/\/www.ssa.gov\/oact\/progdata\/taxRates.html\" target=\"_blank\" rel=\"noopener noreferrer\">2.9% for medicare<\/a> on all net self employment earnings.\u00a0 With self employment tax, the member must pay both the employee and employers share of the payroll taxes on self employment income.\u00a0 They are paying double the amount of payroll taxes they would have to pay if they were an employee.\u00a0 However, the member does receive a tax deduction for one half of the self employment taxes paid for the tax year.<\/p>\n<p style=\"text-align: justify;\"><strong>C-Corporation Method of Federal Income Taxation<br \/>\n<\/strong><\/p>\n<p style=\"text-align: justify;\">A LLC may also be taxed as a C-Corporation.\u00a0 The default classification for a LLC will never be a C-Corporation.\u00a0 Therefore, the LLC must file <a href=\"http:\/\/www.irs.gov\/pub\/irs-pdf\/f8832.pdf\" target=\"_blank\" rel=\"noopener noreferrer\">Form 8832<\/a> to elect to be taxed as a C-Corporation.\u00a0 This form can be filed anytime after the LLC has been formed, but the time the LLC will begin to be taxed as a C-Corporation cannot be more than 75 days before the date of filing with the IRS.<\/p>\n<p style=\"text-align: justify;\">A C-Corporation is considered a separate entity for federal tax apart from its shareholders.\u00a0 The C-Corporation must file its own tax return and pay whatever tax is owed.\u00a0 The C-Corporation files a <a href=\"http:\/\/www.irs.gov\/pub\/irs-pdf\/f1120.pdf\" target=\"_blank\" rel=\"noopener noreferrer\">Form 1120<\/a>.\u00a0 The C-Corporation is becoming increasingly less relevant as an effective method of paying reduced taxes, because individual income tax rates have dropped substantially.\u00a0 The decrease in individual income tax rates has brought the individual rates roughly equal to the corporate tax rates.\u00a0 Because the rates are now roughly equal which prevents shareholders from using the C Corporation to shelter income, more people use partnerships or S-Corporations to take advantage of the tax saving opportunities that those two forms offer over the C-Corporation.<\/p>\n<p style=\"text-align: justify;\">The major problem with the C-Corporation is the concept of &#8220;double taxation.&#8221;\u00a0 The government taxes corporate earnings as the corporation earns the income and taxes the earnings again when the corporation distributes the money to shareholders.\u00a0 Assume the XYZ Corp had $100 of taxable income at year end.\u00a0 The C-Corporation&#8217;s income is taxed at a 20 percent rate.\u00a0 XYZ Corp would be required to pay $20 in tax.\u00a0 The C-Corporation now has $80 in after tax earnings.\u00a0 Now assume that XYZ Corp makes a distribution to its sole shareholder of the entire $80 as a dividend.\u00a0 Assume the dividend will be taxed at a 20 percent rate as well.\u00a0 The shareholder would have to pay $16 of income tax on the distribution from XYZ Corp.\u00a0 Taken together the shareholder has paid $36 in taxes or 36 percent of the LLC&#8217;s income.<\/p>\n<p style=\"text-align: justify;\">A shareholder of a C-Corporation might try to avoid paying taxes on dividends by not making any dividend distributions and keeping all earnings within the C-Corporation.\u00a0 To prevent people from utilizing this strategy, Congress enacted the accumulated earnings tax (&#8220;AET&#8221;).\u00a0\u00a0 The AET gives the IRS the ability to assess taxes against a C-Corporation for failing to pay dividends to their shareholders.\u00a0 If the IRS believes a corporation has accumulated excess earnings, it can assess this penalty tax against the corporation.\u00a0 The tax rate of the penalty coincides with the tax rate shareholders pay on dividends.<\/p>\n<p style=\"text-align: justify;\">Another disadvantage of C-Corporation taxation, is that capital gains are not subject to a preferential rate.\u00a0 Most individuals receive the benefit of paying a lower rate on capital gain income.\u00a0 Capital gain income is typically the income associated with selling stocks, bonds, or from other capital assets.\u00a0 With a C-Corporation, capital gain income will be taxed at whatever the corporate tax rate is.\u00a0 Compared to an S Corporation or Partnership whose capital gain income would flow through to the individual where it would be subject to the special rate.\u00a0 Further, capital losses would be kept inside the C-Corporation and could only be utilized by the corporation; whereas, with the S Corporation or Partnership, the capital losses could be used to offset any capital gains the individual taxpayer might have.<\/p>\n<p style=\"text-align: justify;\"><strong>S Corporation<strong> Method of Federal Income Taxation<\/strong><\/strong><\/p>\n<p style=\"text-align: justify;\">S-Corporations are a pass through entity taxed under subchapter S of the Internal Revenue Code.\u00a0 A pass through entity does not pay tax; rather, the S-Corporation passes earnings and losses through to the shareholders.\u00a0 The shareholders then report the earnings or losses of the S-Corporation on their personal income tax return.\u00a0 There are a few unusual situations under which a S-Corporation might pay tax.\u00a0 One situation occurs when converting a C-Corporation into an S-Corporation.\u00a0 If you have a LLC taxed as a C-Corporation and want to change the method of taxation to a S-Corporation, then any assets of the C-Corporation which have appreciated in value could be subject to the built-in gains tax.<\/p>\n<p style=\"text-align: justify;\">A LLC must make an affirmative election to be taxed as an S-Corporation.\u00a0 This is done by filing an IRS <a href=\"http:\/\/www.irs.gov\/pub\/irs-pdf\/f2553.pdf\" target=\"_blank\" rel=\"noopener noreferrer\">Form 2553<\/a> with the Internal Revenue Service.\u00a0 The filing of the form is time sensitive.\u00a0 The IRS Form 2553 must be filed within the first 75 days after forming a new LLC to have the election be effective from the date of formation or in the first 2.5 months of a calendar year.\u00a0 When the Form 2553 is formed in the first 2.5 months of a calendar year the election is effective as of January 1 of that calendar year.\u00a0 See the <a href=\"http:\/\/www.irs.gov\/pub\/irs-pdf\/i2553.pdf\" target=\"_blank\" rel=\"noopener noreferrer\">instructions to Form 2553<\/a> for more details on when and how to file.<\/p>\n<p style=\"text-align: justify;\">In order to be eligible for S-Corp taxation, the members of the LLC must meet <a href=\"http:\/\/www.weaddvalue.com\/blog\/bid\/344213\/The-8-Requirements-for-an-S-Corporation\" target=\"_blank\" rel=\"noopener noreferrer\">certain eligibility requirements<\/a>.\u00a0 The limited liability company must be a domestic LLC meaning it is formed within the United States.\u00a0 The LLC cannot have any members who are partnerships, corporations, or non-resident aliens.\u00a0 Also, certain types of trusts may not be members of the LLC.\u00a0 The LLC cannot have more than 100 members.\u00a0 Further, certain types of businesses such as financial institutions, insurance companies, and domestic international sales corporations are prohibited from being taxed as a S-Corporations.\u00a0 Keep in mind the that the prohibitions against different types of LLC members are very important.\u00a0 If the LLC either admits a new member, who is of the prohibited type or another member disposes of their interest to a prohibited type of member, the S-election will be terminated leading to disastrous tax consequences.<\/p>\n<p style=\"text-align: justify;\">The S Corporation offers many tax benefits.\u00a0 S-Corporations do not suffer the sting of double taxation associated with C-Corporations, because the S-Corporation passes through all the economic activity to the shareholders.\u00a0 Shareholders, generally, do not pay have to pay tax on distributions they receive from the S-Corporation unless the distribution exceeds their stock basis in the S-Corporation.<\/p>\n<p style=\"text-align: justify;\">Owners of entities taxed as S-Corporations calculate their stock \/ membership interest basis using the following formula.\u00a0 The owner adds any contributions of either cash or property which the owner made to the S-Corporation, and deducts any distributions that the owner receives from the entity.\u00a0 If at the end of the tax year the entity made a net profit, the owner would add the owner&#8217;s share of the entity&#8217;s profits to the owner&#8217;s stock \/ membership interest basis.\u00a0 However, if at the end of the year the entity has a net loss, the owner will decrease the owner&#8217;s stock membership interest basis by the amount of the net loss.<\/p>\n<ul style=\"text-align: justify;\">\n<li><strong>Stock or Membership Interest Basis = Contributions of Money\/Property + Corporate Earnings &#8211; Distributions of Money\/Property &#8211; Corporate Losses<\/strong><\/li>\n<\/ul>\n<p style=\"text-align: justify;\">The ability of an owner of an entity taxed as an S-Corporation to deduct losses on the owner&#8217;s personal income tax return depends upon the owner&#8217;s stock \/ membership interest basis.\u00a0 An owner may only deduct a loss to the extent of the owner&#8217;s stock \/ membership interest basis.\u00a0 For instance assume the entity taxed as an S-Corporation has a $100 net loss for the year, and the owner has stock \/ membership interest basis of $50 at year end.\u00a0 The owner can deduct $50 of the loss on the owner&#8217;s personal income tax return.\u00a0 The remaining loss is suspended and may be deducted when the owner has sufficient basis in their stock \/ membership interest to take the loss.<\/p>\n<p style=\"text-align: justify;\">Entities taxed as S-Corporations can minimize the sting of the self-employment tax.\u00a0 An owner of an entity taxed as an S-Corporation can be treated as an employee.\u00a0 The entity pays the owner a reasonable salary for the services which the owner performs on for the entity.\u00a0 The entity pays the payroll taxes with respect to the owner&#8217;s wages. The entity may deduct the owner&#8217;s wages and corresponding payroll taxes associated with those wages in computing the entity&#8217;s net income.\u00a0 The owner reports the wages as ordinary income on the owner&#8217;s personal tax return.\u00a0 The owner may also report the owner&#8217;s share of the entity&#8217;s net profits on the owner&#8217;s personal income tax return.\u00a0 However, the owner does not have to pay any self employment taxes on the entity&#8217;s profits.\u00a0 Under the sole proprietorship method of federal income taxation, all of the net profits are subject to the self-employment tax.<\/p>\n<p style=\"text-align: justify;\">One key difference between the S-Corporation and partnership methods of taxation concerns the allocation of profits and losses.\u00a0 With a partnership, the partners can choose to allocate income and losses any way they choose as long as those allocations comport with &#8220;substantial economic effect&#8221; requirements of Internal Revenue Code Section 704(b).\u00a0 The entity taxed as an S-Corporation must allocate all profits and losses pro-rata based on the owner&#8217;s ownership interest in the entity.\u00a0 If there were two shareholders of an entity taxed as an S-Corporation with owner A owning 10% and owner B owning 90%, owner B must be allocated 90% of any profit and loss, and owner A must be allocated the remaining 10%.\u00a0 Further, distributions made by the entity to the owners must be made pro-rata.\u00a0 If the entity fails to follow these rules regarding profit and loss allocations and distributions, then the IRS can terminate the entity&#8217;s S election.<\/p>\n<p style=\"text-align: justify;\"><strong>Partnership<strong> Method of Federal Income Taxation<\/strong><\/strong><\/p>\n<p style=\"text-align: justify;\">The other way an LLC can be taxed is as a partnership.\u00a0 The IRS default classification for a multi-member LLC is partnership taxation.\u00a0 A LLC with only husband and wife as members may elect to have the LLC treated as a partnership.\u00a0 The married couple must file <a href=\"http:\/\/www.irs.gov\/pub\/irs-pdf\/f8832.pdf\" target=\"_blank\" rel=\"noopener noreferrer\">Form 8832<\/a> to do so.\u00a0 The partnership must file a tax return on <a href=\"http:\/\/www.irs.gov\/pub\/irs-pdf\/f1065.pdf\" target=\"_blank\" rel=\"noopener noreferrer\">Form 1065<\/a>.\u00a0 The return is for informational purposes only.<\/p>\n<p style=\"text-align: justify;\">The partnership is similar to the S-Corporation method of income taxation in that the entity is considered a pass-through entity.\u00a0 The owners of an entity taxed as a partnership must report all the economic activity of the entity on the owner&#8217;s personal income tax returns.\u00a0 Owners have a tax basis in their partnership \/ membership interest, but partnership basis rules are much more complex than the basis rules that apply to entities taxed as S-Corporations and are beyond the scope of this article.<\/p>\n<p style=\"text-align: justify;\">Entities taxed as partnerships, unlike entities taxed as S-Corporations, can specially allocate income and losses to the owners.\u00a0 However, the Internal Revenue Code requires that allocations of income and losses must have substantial economic effect.\u00a0 The IRS briefly summarizes substantial economic effect as:<\/p>\n<blockquote>\n<p style=\"text-align: justify;\">&#8220;Such flexibility comes with strings attached. Partners are not able to allocate tax benefits among themselves in a manner that is divorced from their allocation of economic profit or loss. A partner who is economically enriched by an item of partnership income or gain is required to shoulder the associated tax burden. Similarly, a partner who is economically hurt by an item of partnership loss will be allocated the tax benefit of the loss. The tax allocations must ultimately conform to the economics of the partnership\u2019s transactions.&#8221;<\/p>\n<\/blockquote>\n<p style=\"text-align: justify;\">If the IRS does not view the entity&#8217;s allocations of profits and losses as having substantial economic effect, then the IRS will reallocate the items based on the owner&#8217;s percentage interest in the entity.<\/p>\n<p style=\"text-align: justify;\">Entities taxed as a partnerships may also make guaranteed payments to the owners.\u00a0 <a href=\"http:\/\/www.irs.gov\/publications\/p541\/ar02.html#en_US_publink1000104259\" target=\"_blank\" rel=\"noopener noreferrer\">IRS Publication 541<\/a> defines a guaranteed payment as:<\/p>\n<blockquote>\n<p style=\"text-align: justify;\">&#8220;Guaranteed payments are those made by a partnership to a partner that are determined without regard to the partnership&#8217;s income. A partnership treats guaranteed payments for services, or for the use of capital, as if they were made to a person who is not a partner. This treatment is for purposes of determining gross income and deductible business expenses only.&#8221;<\/p>\n<\/blockquote>\n<p style=\"text-align: justify;\">Thus, an owner of an entity taxed as a partnership cannot receive wages for services performed on behalf of the entity.\u00a0 The amount of money the owner would have received in wages is treated as a guaranteed payment.\u00a0 The guaranteed payment will be subject to self employment taxes on the owner&#8217;s individual tax return.<\/p>\n<p style=\"text-align: justify;\">The self employment tax issue has created controversy within the context of LLCs taxed as partnerships. Before the advent of the LLC, the general rule was that limited partners of limited partnerships did not have to pay self-employment tax on their distributive share of partnership income, but general partners were required to pay self employment tax on their distributive share of partnership income.\u00a0 Because the legal structure of the LLC differs from that of partnership, such a rule is not easy to apply to LLCs.\u00a0 An LLC does not have the equivalent of a general partner.\u00a0 Members of a LLC all have limited liability, so it seems as though it would be easy to apply the limited partner rule to the LLC.\u00a0 The IRS\u00a0 has taken a different position examining the facts and circumstances surrounding each situation to determine whether LLC members must pay self employment tax.\u00a0 For instance, if the LLC is manager-managed and the member does not serve in the role as a manager, then the member probably would not have to pay self employment tax.\u00a0 The bottom line is that you should consult with your tax adviser to determine the correct reporting requirements for your situation.<\/p>\n<p style=\"text-align: justify;\">Entities taxed as a partnership are not subject to the double taxation problem that plaques entities taxed as C-Corporations.\u00a0 However, one of the drawbacks of the partnership method of taxation is that the reporting requirements can be much more complex than that of the other entities.\u00a0 The <a href=\"http:\/\/www.irs.gov\/pub\/irs-pdf\/i1065.pdf\" target=\"_blank\" rel=\"noopener noreferrer\">instructions to Form 1065<\/a> alone estimate that one should spend 35 hours on keeping and maintaining partnership records, 24 hours on learning about the law and form, 35 hours preparing the form, and 3 hours copying and assembling the form to send to the IRS.\u00a0 This amounts to 97 hours spent on completing your partnership informational tax return.<\/p>\n<p style=\"text-align: justify;\"><strong>Conclusion<\/strong><\/p>\n<p style=\"text-align: justify;\">The LLC offers its owners the most flexibility and choice (the four methods described above) as to the type of federal income taxation that will be best for the owners&#8217; particular situation.\u00a0 The good news is that when you form an LLC, you have 75 days after the date the LLC&#8217;s Articles of Organization are filed with the Arizona Corporation Commission to consult with your tax advisor, determine which of the four tax methods is best for your company and make an election to change the default method of income taxation by filing either an\u00a0<a href=\"http:\/\/www.irs.gov\/pub\/irs-pdf\/f8832.pdf\" target=\"_blank\" rel=\"noopener noreferrer\">IRS Form 8832<\/a> (to elect to be taxed as a C -Corporation) or an\u00a0<a href=\"http:\/\/www.irs.gov\/pub\/irs-pdf\/f2553.pdf\" target=\"_blank\" rel=\"noopener noreferrer\">IRS Form 2553<\/a> to be taxed as an S-Corporation).<\/p>\n<p style=\"text-align: justify;\">Nothing in this article is intended to be legal or tax advice, but rather is a general description of the types of taxation one may elect when operating an LLC and some of the general characteristics of each structure.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>by Arizona LLC Attorney and former CPA Richard C. Keyt An Explanation of the Four Ways LLCs Can Be Taxed One of the advantages to forming an LLC is that it allows maximum flexibility for choosing a method of federal taxation.\u00a0 For instance, if an individual formed a limited partnership, the limited partnership must be taxed as a partnership.\u00a0 Whereas, an individual who forms a corporation must be taxed as either a C Corporation or S Corporation.\u00a0 However, the individual, who forms an LLC, has the whole panacea of federal tax alternatives to choose from.\u00a0 The individual may elect to be taxed as a partnership, taxed as a C Corporation, taxed as a S Corporation, or a sole proprietorship (if the LLC is a single member LLC).\u00a0 This article discusses the various methods of LLC taxation and some of the pros and cons of each method of taxation. The Check The Box Regulations Before discussing the four different methods of federal income taxation available to LLCs, it is important to discuss the tax implications upon forming a LLC.\u00a0 When the LLC is initially formed, federal tax law creates a default manner of taxation for the LLC based upon the number of members the LLC has.\u00a0 The default classification for a single member LLC, whose sole member is an individual, will be classified as a sole proprietorship.\u00a0 The default classification for a single member LLC, whose sole member is a corporation or partnership, will be classified as a disregarded entity for federal income tax purposes.\u00a0 A multi-member LLC will have a default classification as a partnership. These default classifications are important, because if the member(s) wish to change the federal tax classification of the entity, then <a href=\"https:\/\/www.keytlaw.com\/azllclaw\/forming-llcs\/llc-tax-methods\/\"> [&#8230;]<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"parent":7,"menu_order":0,"comment_status":"open","ping_status":"open","template":"","meta":{"om_disable_all_campaigns":false,"footnotes":""},"class_list":["post-2930","page","type-page","status-publish","hentry"],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v27.7 (Yoast SEO v28.0) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>How are LLCs Taxed?<\/title>\n<meta name=\"description\" content=\"Arizona LLC attorney &amp; former CPA Richard C. 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