In the context of limited liability companies (“LLCs”) tax status refers to how the owners of the LLC have chosen to be taxed for federal taxation purposes.
LLCs have a “default” tax status and an “elective” tax status. The default tax status applies if the owners don’t make any tax status choice and the elective tax status applies if they choose something other than the default status.
Default Tax Status
For single owner or husband and wife owned LLCs, the default tax status is “disregarded entity” meaning that the IRS pretends the LLC doesn’t exist and its income and expenses simply get reported as part of the owner(s)’ personal income tax return (in the “Schedule C”).
For multiple owner LLCs, the default tax status is “partnership.”
Elective Tax Status
The owners of any LLC (including single member LLCs) can also choose to be taxed as a corporation. There are two types of corporate tax statuses:
- Subchapter “S” corporation (or “S-corporation”), which is a flow-through tax status designed mostly for smaller corporations; or
- Subchapter “C” corporation (or “C-corporation”), which is not a flow-through tax status (meaning that the corporation would need to file its own tax return)
The choice of tax status can have significant impacts on taxes owed and there are limitations on how often changes can be made. If you have questions about your best tax status choice, you should discuss your circumstances with a tax accountant.