Check The Box
Businesses have the option of telling the IRS how they want to be taxed by the “Check-the-Box,” or “Select-the-Box” method. The “Check-the-Box” method allows a business to choose how it will report and pay taxes to the IRS. The most common scenario is the LLC. Given that the LLC is an entity for state law purposes, the business must choose its tax regime (there is no LLC tax regime). The LLC can choose which tax treatment it would prefer. While the default regime for an LLC is a partnership, the LLC may choose to be taxed as a corporation, or a sole proprietorship. Even further, if an LLC choses to be taxed as a corporation, it has to choose between a C-corp or an S-corp. To utilize this type of treatment, the member(s) of an LLC file the IRS 8832 Entity Classification Election form within 75 days of creating the entity, otherwise the default tax classification of the business applies.
A single member LLC is taxed as a sole proprietorship by default and may elect to be taxed as a C- or S-Corporation. An LLC with two or more members is taxed as partnership by default and may also elect to be taxed as a C- or S-Corporation. Without the IRS’s approval, these default forms of taxation will apply. The IRS 8832 form specifies that the entity has chosen to be taxed as a corporation, and if the entity has elected to be an S-Corporation they must file the 2553 form.
It is important not to forget that to make the S-election, the entity must also meet specific criteria:
- The entity must be domestically located and owned in the U.S. It cannot have non-resident alien shareholders.
- The entity must have 100 shareholders or less. (A married couple plus their estate can be treated as one shareholder. All members of a family and their estate can also be treated as one shareholder.)
- The Corporation can only have one class of stock, which means that each shareholder has the same rights to distribution and liquidation of the Corporation’s stocks.
- Must have the consent of all shareholders.
- Must not be an ineligible Corporation.
An LLC has the advantage of flexibility and limited liability for its owners. However, from a tax and accounting perspective, the LLC will take on the complexity of the box it checks. Overall, a business attorney can be helpful when explaining the circumstances involved when checking the box. Because state tax laws do not always comply with state regulations, it is important to hire a tax attorney who specializes in laws specific to the state in which the LLC is created, in order to comply with all of the LLC's tax obligations. LLCs are not a business option in all states, and each state has very specific LLC rules and requirements.