LLC’s treated as a Disregarded Entity?

What is a disregarded entity? A disregarded entity is a business entity that is separate from its owner but which chooses to be disregarded as separate from the business owner for federal and (most) state tax purposes. A disregarded entity is considered the same entity as the owner for tax purposes (sole proprietorship), but for liability purposes; the legal character of the entity remains.

Is an LLC a disregarded entity?: By default, a single member limited liability company (“LLC”) will be treated as a disregarded entity and a multi-member LLC will be treated as a partnership (married individuals may be treated as a disregarded entity in certain states). However, a single and multi-member LLC, can elect to be treated as a Corporation then make the S-corporation election for tax purposes. The LLC remains a limited liability company from a legal standpoint but for tax purposes it’s treated as an S-Corporation.

Why make the election? Both the S corporation and the LLC provide limited liability protection to the shareholders or members. However, an LLC which elects tax treatment similar to the S corporation, may be an attractive option for certain individuals. By doing this, the LLC can operate with the less formal structure and rules associated with corporations but also obtain reduced FICA tax treatment for the members.

How to make the election? A business person can form an LLC and then make the election to be taxed as a corporation by filing IRS Form 8832 and then make the S election by filing IRS Form 2553 ( in New York an LLC must also file form CT-6 to be treated as a New York S-Corporation). In order to obtain the S-Corp status for the current tax year, you must file for the election before the first two months and fifteen days of the beginning of the tax year in which the election is to take effect.  However, you may by-pass this 75 day rule, if your election is the “initial classification election”, made when you obtain a Federal identification number, or become effective for a date that is over 12 months after the filing.

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