While we still form many corporations, we find that most of our business clients often choose the limited liability company (LLC) form of entity. The reason most often given by a client is that an LLC: (a) can offer more flexibility with multiple members and (b) requires fewer formalities than a corporation does.
Both LLCs and corporations provide their owners with liability protection from business creditors. LLC statutes also provide charging order protection for members under many circumstances with respect to creditors. This, however, is a subject for a future blog
By default, limited liability companies are taxed as partnerships or disregarded entities for income tax purposes. Income tax rates are often lower than those available to corporations.
There are occasions, however, when the owners of an LLC want to utilize the advantages of limited liability, but decide, for commercial reasons, that the entity should be treated as a corporation for income tax purposes. This can be accomplished upon formation of the LLC and after assignment of a taxpayer ID number by the Internal Revenue Service (IRS). How? By filing Form 8832 with the IRS. This form is an election that the IRS treat the LLC as a C corporation for income tax purposes.
What if the LLC owners wish for it to be taxed as a corporation, but not as a C corporation? In that case, the LLC can file Form 2553 electing, if all tax code requirements are met, tax treatment as an S corporation. This type of corporation is a pass-through entity allowing for its owners to be taxed on their income, which could result in lower income tax rates.
You may be asking why an LLC would want to request tax treatment as a corporation, either as a C or S corporation. There are various tax and non-tax reasons for this. In any event, you will want to involve your CPA in the decision process.