Limited liability company

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Limited Liability Company (LLC) is an entity formed under state law by filing articles of organization as an LLC. Unlike a partnership, none of the members of an LLC are personally liable for its debts. An LLC may be classified for Federal income tax purposes either as a partnership, a corporation, or an entity disregarded as an entity separate from its owner by applying the rules in Regulations section 301.7701-3. See Form 8832, Entity Classification Election, for more details. (Form 1065 Instructions)

LLC Tax Law Classification[1]: Tax law doesn't recognize the LLC as an entity type. The IRS has devised a method to classify LLCs and other unincorporated entities for purposes of filing Federal income tax. New Treas. Reg. Sections 1.7701-1 through 1.7701-6 define business entities and corporations. Certain entities are always classified as corporations. If the business is an unincorporated business entity, and there are two or more owners, the entity can choose to be a partnership or a corporation. If an unincorporated business entity has only one owner, it can either elect to be a corporation or the entity can be disregarded. If a person owns a disregarded entity, it is treated as a sole proprietorship. If a corporation owns a disregarded entity, it is treated as a division or branch of the corporation.

Single Member LLC: A single member LLC generally has the following choices:

  1. File Form 8832 and (if qualified) Form 2553 to be taxed as an Scorporation.
  2. File Form 8832 to be taxed as a corporation.
  3. Be taxed by default as a disregarded entity. If the member is a person, the LLC will be taxed as a sole proprietorship. If the member is a corporation, the LLC will be taxed as a division of the corporation.

Multiple Member LLC: A multiple member LLC generally has the following choices:

  1. File Form 8832 and (if qualified) Form 2553 to be taxed as an Scorporation.
  2. File Form 8832 to be taxed as a corporation.
  3. Be taxed (by default) as a partnership.

References:
  1. http://www.irs.gov/pub/irs-pdf/p1635.pdf
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