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How limited liability companies are viewed by the IRS

On Behalf of | Jul 30, 2020 | Business Formation |

When Pennsylvania entrepreneurs start new businesses, choosing an appropriate legal entity structure is important. One type of legal entity structure that is popular among business owners is a limited liability company. An LLC limits the liability of the owners so that their personal assets are shielded if the company is sued.

Limited liability companies are structures that are allowed under state law. The owners of an LLC are referred to as members. The members can be people, corporations, foreign entities, and other LLCs, and there is not a limit on the number of members allowed for an LLC. Certain types of businesses cannot be structured as LLCs, however.

The Internal Revenue Service looks at the elections made under the LLC to determine how it will be treated for tax purposes. It may be treated as a disregarded entity, partnership, or corporation. If it is treated as a disregarded entity, the income from the LLC that the owner receives should be reported on the owner’s personal income tax return. One-member LLCs are treated as disregarded entities. LLCs with two members are treated as partnerships unless they elect to be treated as corporations. An LLC can file Form 8832 if it wants to change its federal tax classification.

Business owners should think carefully about the various types of legal entity structures and which type will be most appropriate for their operations. An experienced business and commercial law attorney can help clients to evaluate the various structures so that they might choose the one that affords the greatest protection and tax benefits. Once a business owner chooses a structure, the attorney may then help the client to file the proper paperwork with the state and to understand the obligations that the business will have to maintain the chosen structure.