How Should I Classify My Small Business?  LLC?  C or S Corp.?  Sole Proprietor?

Many small business people get the LLC classification, which is a state entity, confused with the various IRS classifications. Most small businesses are classified as sole proprietors, corporations – C or S, or partnerships for tax return purposes. It is important to know the difference when completing a W-9 - Request for Taxpayer Identification Number and Certification, the form that must be provided to customers for the completion of 1099’s at the end of the year. The IRS has provided the following information to help clarify the differences.

For IRS purposes, how do I classify a limited liability company? Is it a sole proprietorship, partnership or a corporation? A 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 as if it were a sole proprietorship (referred to as an entity to be disregarded as separate from its owner), a partnership or a corporation. If the LLC has only one owner, it will automatically be treated as if it were a sole proprietorship (referred to as an entity to be disregarded as separate from its owner), unless an election is made to be treated as a corporation. If the LLC has two or more owners, it will automatically be considered to be a partnership unless an election is made to be treated as a corporation. If the LLC does not elect its classification, a default classification of partnership (multi¬member LLC) or disregarded entity (taxed as if it were a sole proprietorship) will apply. The election referred to is made using the Form 8832 (POF), Entity Classification Election. If a taxpayer does not file Form 8832 (POF), a default classification will apply.

Webpage from which this information was obtained: http://www.irs.gov/faqs/faq12-1.html

References:

• Publication 3402 (POF) Tax Issues For Limited Liability Companies
• Publication 334, Tax Guide for Small Business
• Tax Topic 103, Small Business Tax Education Program
• Publication 542, Corporations
• Publication 541, Partnerships
• Form 8832 CPOFt Entitv Classification Election