Limited liability companies have come a long way in the U.S. since first appearing in Wyoming in 1977. For most people, a limited liability company with one member is treated as a disregarded entity for federal and Arizona income tax purposes, meaning income and loss are directly reflected on the member’s tax return. And a limited liability company with multiple members is treated as a partnership for income tax purposes.
However, an option does exist for an election to be made to have the limited liability company taxed as a corporation for income tax purposes. The election can be made by timely filing Federal Form 8832 with the Internal Revenue Service, but such an election cannot take effect more than 75 days prior to or 12 months after the date the election is filed. Once made, an election cannot be revoked for 60 months after the effective date of the election.
Why would this election be made? One situation we see is where foreign owners desire to have the flexibility and informality of a limited liability company, but wish to avoid any immediate taxable income flowing to them in their home country for current income tax purposes. But there can be disadvantages, such as the possibility of double taxation. So each situation needs to be reviewed carefully first before an election is made.
Michael W. Margrave