Limited Liability Companies (“LLCs”) are flexible entities, for a variety of reasons. One way in which they are extremely flexible is with respect to their federal income tax classification. LLCs are a state law entity, but can be classified in a number of different ways for federal income tax purposes.
For example, a state law LLC can be classified for federal income tax purposes as:
- a disregarded entity (meaning, an entity that doesn’t exist for federal income tax purposes);
- a partnership;
- a corporation; or
- an S corporation.
It is easy to be confused with this many choices. Why would you form an LLC if you wanted to be taxed for federal income tax purposes as a corporation (why not just form as a state law corporation)? Perhaps for the perceived simplicity of the LLC form under state law? Maybe.
In my experience, corporations under state law do not entail that much more complexity than LLCs. With respect to both you should maintain records of meetings, you must file annual reports, you will need separate bank accounts, etc. Nevertheless, some people perceive a reduction in administrative burdens by forming an LLC instead of a corporation. So, if you want to avail yourself of the simplicity of the LLC for state law purposes, but still be taxed like a corporation for federal income tax purposes–it is possible.