An LLC is not a corporation, but it shares certain characteristics, including limited liability for its owners. An LLC is governed by a contract called an LLC Operating Agreement.
Both an LLC and an S Corp have flow-through taxation. Keep in mind that an LLC’s distribution of profits is subject to an employment tax, whereas an S Corp’s dividends are not.
Limited liability companies, like partnerships and sole proprietorships, are pass-through entities. An LLC with multiple owners can either accept its default classification as a partnership, or file Form 8832 to elect to be classified as an association taxable as a corporation.
Tax Classification of LLC
An LLC with multiple owners can accept its default classification as a partnership, or file Form 8832 to elect to be classified as an association taxable as a corporation. A single-member LLC (SMLLC) is treated as a disregarded entity by the IRS.
An S corporation usually does not pay federal taxes at the corporate level. The owner can report the taxes on their personal tax return, similar to an LLC or sole proprietorship.
Tax Treatment of LLC
An LLC provides the limited liability features of a corporation and the tax efficiencies of a partnership. LLC members may include individuals, corporations, and foreign entities. Some LLCs are automatically classified and taxed as corporations.
An LLC can elect to be taxed as an S Corporation by filing IRS form 2553 or as a C Corporation by completing IRS form 8832.
Miscellaneous Information
An LLC is a hybrid legal entity having certain characteristics of both a corporation and a partnership. An LLC shares limited liability with a corporation and pass-through income taxation with a partnership.
Ownership of an LLC is through membership interests. Liability protection limits owner liability while requiring less paperwork than a corporation.