Classification of LLCs Under the Check-the-Box Regulations

John, a white man with dark brown hair, wears a pale blue shirt, lime green and blue tie, and black suit. By John G. Hodnette

Limited Liability Companies (or LLCs) were invented in Wyoming in 1977. They have since spread to all states and become one of the most popular entities to use for businesses. From a tax perspective, LLCs are hybrid entities that can elect to be taxed in a number of different ways. Regulations that became effective in 1997 (commonly referred to as the “check-the-box regulations”) provide tax classification. Treas. Reg. § 301.7701-1, et. seq.

Treas. Reg. § 301.7701-3(b)(1) describes the default treatment of LLCs where no check-the-box election is made. The default treatment of an LLC with a single owner is as an entity disregarded as separate from its owner for income tax purposes. Treas. Reg. § 301.7701-3(b)(1)(ii). As a disregarded entity, the LLC has no federal income tax filing requirements. Its activities (including income and loss) are instead reported on the tax return of its sole owner. Where an LLC has more than one owner, the default treatment is as a partnership. It is required to file an annual Form 1065 to report the pass-through income and loss allocated to its partners.

Regardless of the number of owners an LLC has, it can elect (via the filing of Form 8832) to be treated as an association taxed as a corporation. Treas. Reg. § 301.7701-2(a). Absent the filing of a Form 2553 (the S election form), the filing of Form 8832 is required for the LLC to be taxed as a C corporation. If Form 2553 is instead filed, the LLC is taxed as an S corporation, requiring the filing of an annual Form 1120-S tax return. Where an LLC files Form 2553 electing to be taxed as an S corporation, it is not required also to file Form 8832 electing to be taxed as a corporation because the S election is deemed also to be an election by the LLC to be treated as an association taxed as a corporation. Treas. Reg. § 301.7701-3(c)(1)(v)(C).

Elections made pursuant to Form 8832 can be retroactive up to 75 days prior to the filing of the election and cannot be effective more than 12 months after the date on which the election is filed. Treas. Reg. § 301.7701-3(c)(1)(iii). Once an election is made (other than an initial election), the LLC cannot change its tax classification by filing another Form 8832 until sixty months after the effective date of the election. Treas. Reg. § 301.7701-3(c)(1)(iv).

 John G. Hodnette is an attorney with Fox Rothschild, LLP in Charlotte.

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