Contents
1) Default classifications: the path of least resistance
The check-the-box system means the LLC’s legal form is separate from its federal tax identity. If you don’t file an election, the IRS applies defaults mainly based on the number of members. :contentReference[oaicite:1]{index=1}
Single-member LLC
Defaults to a disregarded entity (reported on the owner’s return), but the LLC can still be treated as a separate employer for payroll tax purposes. :contentReference[oaicite:2]{index=2}
Multi-member LLC
Defaults to partnership taxation (Form 1065 + K-1s), with flexible allocation rules and more complex capital/basis tracking. :contentReference[oaicite:3]{index=3}
2) Elections: when (and why) you change the default
LLCs can elect corporate tax treatment—often to manage self-employment tax exposure (S-Corp) or to pursue corporate strategies like retained earnings or QSBS (C-Corp). Elections have timing and “lock-in” effects that make planning important. :contentReference[oaicite:4]{index=4}
Common election paths
- • Form 8832: elect to be taxed as a C-Corporation :contentReference[oaicite:5]{index=5}
- • Form 2553: elect S-Corporation status (must meet eligibility rules) :contentReference[oaicite:6]{index=6}
3) S-Corp election: the payroll tax shield
The basic idea: salary is subject to payroll taxes, but distributions are typically not. This creates potential savings—while also creating compliance obligations and a “reasonable compensation” requirement. :contentReference[oaicite:7]{index=7}
Where savings come from
Split owner income into W-2 wages + distributions, so not all profit is treated like self-employment earnings. :contentReference[oaicite:8]{index=8}
The key risk
Salary set too low can be recharacterized as wages, triggering back taxes, penalties, and interest. :contentReference[oaicite:9]{index=9}
4) C-Corp election: 21% rate + QSBS (Section 1202)
C-Corp status can be attractive for businesses that retain earnings for reinvestment, and for venture-style high-growth companies planning for an exit—especially because QSBS may allow exclusion of gain after a 5-year holding period (subject to strict rules). :contentReference[oaicite:10]{index=10}
Watch-outs
- • Double taxation risk if profits are distributed regularly :contentReference[oaicite:11]{index=11}
- • Converting “later” can reduce QSBS benefit because only post-conversion appreciation may qualify :contentReference[oaicite:12]{index=12}
5) State taxes: the decision isn’t purely federal
State regimes can dominate the math: annual minimum taxes, gross receipts fees, city-level business taxes, and pass-through entity (PTE) elections created in response to the federal SALT cap. :contentReference[oaicite:13]{index=13}
Example: fee vs income tax mismatch
In some states, LLC fees are tied to revenue (not profit), which can push businesses toward S-Corp taxation. :contentReference[oaicite:14]{index=14}
PTE election
Many states allow entity-level tax payments that can be deductible federally, effectively working around the SALT cap. :contentReference[oaicite:15]{index=15}
Bottom line
LLC taxation is less about the LLC itself and more about choosing and maintaining the right tax identity—then revisiting that choice as profit level, growth goals, and state/federal rules evolve. :contentReference[oaicite:16]{index=16}