Check the Box on LLCs

author by Dominique Gabrielle Young on Sep. 20, 2023

Business Business Organization Tax  Corporate Tax 

Summary: I'm registered as a single member LLC and trying to register with the IRS, yet I don't know which box to check? Sole Proprietor? Corporation? Which one is best for me? If you have asked yourself any of those questions, this blog article is for you.

Many times, when individuals go to start a business, their first inclination is to form an LLC (Liability Company).  They want the separate status for their business, remain the sole owner, and remove the extra procedures and organizational rules of being a corporation.  Business owners run to this entity selection and lawyers readily offer this entity selection.  Though the difference between an LLC and a sole proprietorship in the eyes of the IRS (Internal Revenue Service) is not much different than if you are a sole proprietor. 

So how did LLCs even come into existence in the United States.  The limited liability company entity is an international concept brought to the states by an oil company.  The owner of an oil company with operations in Panama wanted the same business structure for his company in the states.  When he first pushed for the entity in the states, the legislature declined him.  One state, however, did not.  Wyoming was the first state in the United States to provide for the LLC entity selection. 

Some would think that when the state permits a type of entity, the federal government acknowledges it as well.  Not so.  For tax practitioners, an LLC serves as a check the box entity with the IRS.  That means, though you are an LLC in one state, to the IRS, you are either a sole proprietorship, a partnership, or a corporation.  When you complete your Entity Classification Election form, you must choose how to tax your LLC.  If you are a single-member LLC, you have two options: a disregarded entity or corporation. 

In all honesty, whether your LLC is owned by one member or two or more, there is not much difference if you do not choose to be taxed as a corporation.  A partnership is simply a single endeavor by two individuals for a particular purpose.  With your choosing, the tax advantages and disadvantages can be passed through to the partners in the partnership.  That is why LLCs are often spoken of as pass-through entities.  If your LLC is a single member business, checking the box on disregarded entity just means that the tax advantages and disadvantages are passed on to you on your personal tax return.  No additional tax return is needed. 

If you want to be taxed as a corporation, for the separation of your personal taxes and that of your business, do not despair.  You can elect to the taxed as a corporation then file for S-Corp status.  The S-Corp status is also a pass-through.  Though there are certain qualifications that must be met to meet the S-Corp status requirement, if you are a single-member LLC that elects to be taxed as a corporation, you will probably meet those requirements to be taxed as an S-Corp.  Or, ou can simple be taxed as a C-Corp and keep all your tax obligations separate from your personal tax obligations.

So, whether you prefer the formality of a corporation or the less structured nature of an LLC, the option to remain a regarded entity in the eyes of the IRS is an option to check in the box. 

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