The IRS allows owners of LLC’s to make the decision themselves about how they want the company to be taxed. The LLC can be taxed as in two general ways:
- As a pass-though entity, like a s-corporation, sole proprietorship
- Like a c-corporation
What is a pass though entity?
Usually business owners planning on forming a LLC at the startup stage decide that the LLC should be a pass through entity. What this means is that the corporation itself does not pay any taxes. All tax profits and losses are reported by each business member on their tax return. Like a sole proprietor, each owner files a schedule c.
If your LCC has more than 1 member be aware that each member must file the IRS Form 1065 and must be the same one used by the LLC.
How to Change your tax treatment
What makes LLC’s unique is the ability of its members to change the way it is taxed. You can elect to be taxed as a S or a C corporation. To make this change, you only have to check the box that you wished to be taxed in form 8832 and simply file it with the IRS. You can make this election at any time. You will now be required to file corporate tax returns.
If you are interested in the entity being taxed as an S, simply file IRS Form 2553. Be aware that to file as an S corporation, you have to meet its conditions. Unfortunately, if you wish to change the way your LLC corporate taxed back to a partnership, you will have to wait five years to do so.
If you have any questions regarding starting a business in New York and tax issues related to it, contact me at the Law Office of Frederic R. Abramson at 212-233-0666.