When you form a limited liability company (LLC), it is automatically treated as a “disregarded entity” by the IRS. One-member LLCs are taxed as sole proprietorships, and multiple member LLCs are taxed as partnerships. Business owners who operate as disregarded entities must pay quarterly estimated payments or be subject to penalties by the IRS.
In my opinion, such classification does not offer the same tax benefits of an S corporation, but on the other hand the LLC requires less formality than an S or C corporation. So how can you have the best of both worlds?
Two easy steps:
Step One: If you have not already formed an LLC, you can quickly create one, and use a tax professional to make sure you do it right. The LLC avoids many of the formalities of the S or C Corporation.
Step Two: An LLC can elect under the check-the-box rules to be classified as a corporation. The LLC files the election to be taxed as a corporation on Form 8832, Entity Classification Election, and the effective date of the classification election on Form 8832 cannot be more than 75 days before the date on which the election is filed and it cannot be more than 12 months after the date on which the election is filed. In other words, the classification change can be retroactive for up to 75 days before the entity files Form 8832.
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