How Do You Classify A Domestic LLC with the IRS?

Michael Lodge

by Michael Lodge

This question comes up a lot from clients forming a new business.  How can a LLC be classified for tax purposes with multi members or one single member.

Question: For IRS purposes, how do I classify a domestic limited liability company? Is it a sole proprietorship (disregarded entity), partnership, or a corporation?


A domestic limited liability company (LLC) is an entity:

  • Formed under state law by filing articles of organization as an LLC.
  • Where none of the members of an LLC are personally liable for its debts.

For federal income tax purposes, an LLC may be classified and taxed as a sole proprietorship (single member), partnership (multi member), or a corporation (single or multi member).

Generally, if a domestic LLC has:

  • Only one owner, the IRS will by default treat it as if it were a sole proprietorship (disregarded entity) unless the owner makes an election to have it treated as a corporation. Special rules exist for residents of community property states, where the qualified joint venture rules may apply (as referenced in Publication 541, Partnerships).
  • Two or more owners, the IRS will by default treat it as a partnership unless the entity makes an election to have it treated as a corporation.

Either one of these entities may elect a classification as a standard corporation. Use Form 8832, Entity Classification Election, to make this election. If a taxpayer does not file Form 8832, the default classification will apply. Different classification rules may apply in certain situations for certain types of businesses, including: banks, insurance companies, and nonprofit organizations that are also organized as an LLC.

Note: If an LLC that is otherwise disregarded has employees, the law treats it as an entity separate from its owner for reporting and payment of employment taxes.

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