LLCs have a variety of tax elections available to them, including the option to be treated as a corporation, partnership, or disregarded entity. Corporations can choose between C and S elections, while limited partnerships can elect to be treated as a corporation. The tax consequences of these elections differ significantly, but it is possible to change an election after it is made, although the process and consequences vary depending on the situation.
First, it is important to understand what a corporate election is and why it matters for LLCs. As the regulation 26 C.F.R. § 301.7701-3 explains, a corporate election allows an LLC to choose its tax classification, which can have significant consequences for the company’s tax liability. The regulation also sets out the default classifications for entities that do not make an election.
There are a few different elections available to LLCs. As the case Littriello v. U.S. discusses, an LLC with only one member can elect to be treated as a disregarded entity, an S corporation, or a C corporation. For LLCs with more than one member, the default classification is as a partnership, but they can elect to be treated as an association (i.e. a corporation) instead.
Corporations can also choose between C and S elections. As the analysis “Starting a Business in Texas: Choice of Entity” explains, an S corporation avoids the double taxation that a C corporation is subject to, but there are certain eligibility requirements that must be met in order to make this election.
Limited partnerships can also elect to be treated as a corporation, as the case Littriello v. U.S. discusses. This allows them to take advantage of the tax benefits that come with corporate status.
The tax consequences of these elections differ significantly. As the case McNamee v. Dept. explains, a single-member LLC that does not elect to be treated as a corporation is taxed as a sole proprietorship, while an LLC that elects to be treated as a corporation is subject to the corporate tax. The case Tomseth v. United States discusses the tax benefits of an S-corporation election, which allows the company to pass its income directly to its shareholders, avoiding double taxation.
It is possible to change an election after it is made. As 26 C.F.R. § 301.7701-3 explains, an LLC can change its classification by filing Form 8832 with the IRS. The case In re Vital Pharm. discusses the process for revoking an S-corporation election, which is governed by Internal Revenue Code § 1362 and Treasury Regulation § 1.1362-6. The case Tomseth v. United States also discusses the tax consequences of changing from an S-corp to a C-corp and back again.
There are a few examples of major companies that have changed their corporate election. As the case Tomseth v. United States discusses, the Les Schwab tire companies have toggled between operating as S-corps and C-corps in order to take advantage of the tax benefits of each designation.