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For federal tax purposes, an LLC can be treated as either a corporation, partnership, or as a disregarded entity (i.e. income is included on the owner’s individual federal income tax return).
When you form an LLC, you can either stick with the default IRS tax classification, or you can elect for different tax treatment using Form 8832.
What are my choices when filing Form 8832?
As an LLC, you can choose what kind of taxpayer your business is treated as. This choice can reduce your business tax bill. Talking to a CPA or tax professional before filing Form 8832 will help you understand how it impacts your taxes and business operations so you’re making the right choice. With a premium Bench subscription, you get access to unlimited, on-demand tax consultations to help you answer your tax questions—like deciding which business structure is best for you and more.
There are four separate scenarios your LLC could fall under:
- If it’s a single-member LLC and doesn’t file 8832, it files taxes exactly as a sole proprietorship (which is the default tax status for single-member LLCs). You then report your income on tax Form 1040 (your personal tax return).
- If it’s a multi-member LLC and doesn’t file 8832, it files taxes like a partnership using tax Form 1065 by default.
- If it opts to file for C corporation tax status by submitting Form 8832, it files using tax Form 1120. Keep in mind you must file articles of incorporation.
- If you want your LLC to be taxed as an S corporation, you don’t use Form 8832. Instead, you file IRS Form 2553 to elect to file as an S corporation. You then file using tax Form 1120S.
Further reading: C Corp vs. LLC: Which Is Better for Early-Stage Entrepreneurs?
How Bench can help
The filing type you choose can be more costly for your business or save you money. Talking about your options with a tax professional helps you understand the impact of each so you can make the right choice for your specific needs. At Bench, we handle your bookkeeping. And with a premium subscription, you also get access to unlimited, on-demand consultations with our tax professionals. They’re available to talk about any decision you want professional, experienced support on. Bench’s tax professionals work in tandem with our bookkeeping team to ensure your reporting is up-to-date with any changes you make to your business. Learn more.
How to file Form 8832
The digital version of Form 8832 is three pages long. The first page looks like this:
Form 8832 is divided into two parts:
Part I: Election Information
Line 1 asks whether you’re a newly-formed entity electing for the first time, or an existing entity electing to change their initial classification.
Lines 2a and 2b ask whether you’ve filed to change your status within the last 60 months (5 years). If you have, you won’t be able to make the election. (However you might be eligible for an early reelection if more than half of your shareholders have turned over since then. Consult a tax expert to see if you’re eligible.)
Line 3 asks whether you’re a single owner or multi-owner LLC. If you’re a single-member LLC, move on to Line 4. If you’re a multi-member LLC, skip ahead to line 5.
Line 4 asks you for the name and identifying number (typically Social Security number) of the owner.
If your LLC has a parent corporation, enter that information on Line 5 with the Employer Identification number.
Line 6 asks you for the type of entity you’re electing to be taxed as, and whether your business is a domestic eligible entity.
If you’re based in the United States, check a if you want to be taxed as a corporation, b to be taxed as a partnership, and c as a sole proprietor.
If your business is based in a foreign country, check d if you want to be taxed as a corporation, e to be taxed as a partnership, and f as a sole proprietor.
If you’re a foreign entity, line 7 will ask you where you’re based out of.
Line 8 asks you for the effective date of the election (i.e. when you want it to come into effect). You must choose a date that is between 75 days before and 12 months after the filing date of the form.
Lines 9 and 10 ask for a point of contact in your business that the IRS can call to ask for more information. Include the name and phone number of the best person for the IRS to contact if they have any followup questions.
Finally, the Consent Statement and Signature(s) section must be filled out by a) every shareholder of the company at the time of filing, or b) an officer, manager, or member authorized to act on behalf of the company.
Part II: Late Election Relief
Your tax election can only be applied to a full tax year. If you file a completed Form 8832 halfway through your fiscal year, your election would take effect the following fiscal year—unless you successfully apply for Late Election Relief.
The filing date of Form 8832 is within the first 75 days of your fiscal year. If you can’t make that timeframe, you can fill out Part II of the form to apply for late-classification relief.
To qualify, you must have filed all your other tax returns on time, have “reasonable cause” for missing the deadline, and the requested election date can’t be more than three years and 75 days before the day you file for late election relief.
Line 11 provides room for you to explain why you were unable to file 8832 on time. This part should be signed by the same person or people who signed the bottom of Part I.
Where do I file Form 8832?
A physical copy of Form 8832 must be sent to the Department of the Treasury Internal Revenue Service. There are two service center locations, one in Kansas City and the other in Ogden. Which one you send it to depends on where your business is located. Foreign eligible entities must submit their form to the Ogden location.
Which business entity should I file as?
Limited liability companies usually face the choice between filing as a C or S corp. Which one should you choose?
The main difference between C corps and S corps is double taxation, which refers to how income earned by C corps is taxed twice: once when the corporation earns income, and again when it distributes dividends to its owners (who pay taxes on those dividends).
S corps avoid double taxation by passing their income through to their owners directly. S corps don’t technically pay taxes—instead, their owners do.
S corp status can save you money on your taxes, but comes with certain restrictions. S corps can’t have more than 100 shareholders, they all have to be U.S. citizens, and they can only own one class of stock, for example.
Generally speaking, you should stick with C corporation status if:
- You’re a new and growing business, and intend to reinvest profits back into the business
- You’re raising money from investors (who are much less likely to invest in a pass-through entity)
- Any of your owners are not based in the U.S.
On the other hand, you should should file for S corp status if:
- You (or any other owner) want to take profits out of the company in the form of distributions
- You’re a domestic corporation
- You don’t plan on having more than 100 shareholders
- You intend on paying yourself a “reasonable salary,” as defined by the IRS
How do I elect S corp status if I’m not an LLC?
If you’re electing S corp status as an LLC or C corporation, you must submit Form 2553, Election by a Small Business Corporation to the IRS, signed by all of your company’s shareholders.
