Short answer: An LLC is not its own tax category. The IRS taxes it as one of four things. A single-member LLC is a disregarded entity by default, taxed like a sole proprietorship. A multi-member LLC is a partnership by default. Either one can elect to be taxed as a C corporation with Form 8832 or as an S corporation with Form 2553. Non-US residents cannot own an S corporation, so a foreign-owned LLC stays disregarded, partnership or C corp.
The Four LLC Tax Classifications Compared
| Disregarded entity | Partnership | S corporation | C corporation | |
|---|---|---|---|---|
| Who gets it | Single-member LLCs by default | Multi-member LLCs by default | Any eligible LLC that files Form 2553 | Any LLC that files Form 8832 |
| Federal return | None for the LLC. Owner files Schedule C (or E) with Form 1040 | Form 1065 and a Schedule K-1 per member | Form 1120-S and a Schedule K-1 per owner | Form 1120 |
| Who pays income tax | The owner | The members | The owners | The LLC, at the 21% corporate rate |
| Self-employment tax | On all net earnings | On each active member’s share | Only on salary paid through payroll | None on profits. Owners pay payroll tax on salary |
| Double taxation | No | No | No | Yes, on dividends paid to owners |
| Owner limits | One owner | Two or more | Up to 100 owners, all US citizens or residents | None |
| Best for | Solo owners starting out | Co-owners sharing profits | US owners with steady profit who want to cut self-employment tax | Businesses keeping profit in the company or raising investment |
Default Tax Classifications
You do not file anything to get your LLC’s default classification. The IRS assigns it based on the number of owners.
Single-Member LLC: Disregarded Entity
The IRS ignores the LLC for income tax and treats the income as the owner’s. You report business income and expenses on Schedule C with your Form 1040 (Schedule E for rental property) and pay self-employment tax on net earnings. The LLC still needs an EIN to open a bank account and to file payroll or excise taxes.
A foreign-owned single-member LLC is also a disregarded entity, with one extra rule: it files Form 5472 with a pro forma Form 1120 for any year it has transactions with its owner.
Multi-Member LLC: Partnership
The LLC files Form 1065 each year and gives every member a Schedule K-1 showing their share of profit or loss. The LLC pays no federal income tax itself. Members report their share on their own returns, whether or not the money was distributed.
Electing C Corporation Taxation
File IRS Form 8832 to have your LLC taxed as a C corporation. The election can take effect up to 75 days before or 12 months after you file it.
- How it works: the LLC pays tax on its profit at the flat 21% federal corporate rate and files Form 1120.
- Double taxation: profit paid out to owners as dividends is taxed again on the owners’ returns.
- When it fits: you plan to keep most profit in the business, raise money from investors or own the LLC as a non-US resident who wants the business to pay its own US tax.
- The 60-month rule: after you change classification with Form 8832, you cannot change it again for 60 months, with limited exceptions.
Electing S Corporation Taxation
File IRS Form 2553 to have your LLC taxed as an S corporation. An eligible LLC that files Form 2553 is treated as electing corporate status at the same time, so it does not file Form 8832 too.
- How it works: you pay yourself a reasonable salary through payroll and take the rest of the profit as distributions. Distributions are not subject to self-employment tax.
- Deadline: file within 2 months and 15 days after the start of the tax year the election should apply to, which is March 15 for a calendar-year LLC. You can also file any time in the year before.
- Who qualifies: up to 100 owners, all US citizens or US residents, and one class of ownership. A non-US resident owner makes the LLC ineligible.
- Extra cost: payroll, a separate Form 1120-S every year and state filings in some states.
See how an S corp election lowers self-employment tax, with the math. BusinessAnywhere’s S corp tax election service prepares and files Form 2553 for you.
S Corp vs. C Corp Election: Which One?
| S corp election | C corp election | |
|---|---|---|
| Form | Form 2553 | Form 8832 |
| Federal income tax on profit | Paid by owners at their personal rates | Paid by the LLC at 21% |
| Tax on money paid to owners | Salary taxed through payroll, distributions not subject to self-employment tax | Salary taxed through payroll, dividends taxed again |
| Non-US resident owners | Not allowed | Allowed |
| Ownership limits | Up to 100 owners, one class | None |
| Best for | Profitable US-owned businesses paying out most profit | Businesses reinvesting profit or raising venture capital |
For more detail, read S corp vs C corp: what is the difference.
How to Choose Your LLC Tax Classification
- Start with the default if you are new, profit is small or you are still testing the idea.
- Consider an S corp election once your profit is high enough that the self-employment tax you save on distributions exceeds the cost of payroll and an extra tax return, and every owner is a US citizen or resident.
- Consider a C corp election if you will keep profit in the business, need outside investors or are a non-US owner who wants the LLC to file and pay its own US tax.
- Check your state. Some states tax S corps and LLCs differently, so a federal election can change your state bill.
- Run the numbers with an accountant before you file, because the 60-month rule limits switching back.
How to Find Your LLC’s Current Tax Classification
- Your EIN confirmation letter (CP 575) states the form your LLC is expected to file, such as Form 1065 or Form 1120.
- An S corp acceptance letter (CP 261) means the IRS accepted your Form 2553.
- An acceptance of Form 8832 confirms a C corp election.
- No election filed means your LLC has its default classification: disregarded with one owner, partnership with two or more.
- Lost letters: call the IRS Business and Specialty Tax Line and ask for a 147C letter, which confirms your EIN and filing requirements.
LLC Tax Classification on Form W-9
Clients ask for a W-9 before they pay you, and the form asks for your federal tax classification.
- Single-member LLC, disregarded: check the individual or sole proprietor box and enter the owner’s name on line 1, with the LLC’s name on line 2.
- Partnership, S corp or C corp: check the limited liability company box and enter P, S or C.
FAQs
What tax classification is an LLC?
An LLC has no tax classification of its own. By default, the IRS taxes a single-member LLC as a disregarded entity and a multi-member LLC as a partnership. An LLC can elect to be taxed as an S corporation with Form 2553 or a C corporation with Form 8832.
What is the default tax classification for an LLC?
A single-member LLC is a disregarded entity and a multi-member LLC is a partnership. You get the default automatically without filing anything.
What is the best tax classification for an LLC?
The default is best for most new LLCs. An S corp election saves self-employment tax for profitable US-owned LLCs that pay out most of their profit. A C corp election suits LLCs that reinvest profit or raise outside investment.
Can a non-US resident’s LLC elect S corp status?
No. S corporations can only have US citizens and US residents as owners. A foreign-owned LLC can keep its default classification or elect C corporation status with Form 8832.
How do I change my LLC tax classification?
File Form 2553 to elect S corporation status or Form 8832 to elect C corporation status. After a change with Form 8832, you cannot change again for 60 months, with limited exceptions.
How do I know my LLC’s tax classification?
Check your EIN confirmation letter (CP 575) and any IRS acceptance letter for Form 2553 or Form 8832. If you never filed an election, your LLC has the default classification for its number of owners.
