When is a limited liability company taxed as a partnership, and when is it taxed as a sole proprietorship?
If the limited liability company has only one member, it will be treated as a sole proprietorship for federal tax purposes, unless the member-owner elects otherwise. If the limited liability company has two or more members, it will be taxed as a partnership under IRS rules, unless it elects to be taxed otherwise. In order for a limited liability company to be taxed as a partnership, however, there are a few restrictions upon the distributions such companies can make to their members. First, the distribution allocations must have some “substantial economic” relation to the actual economic risks or rewards of the members, and second, the members may be subject to income tax on their contribution of future services to the company. A multiple-member limited liability company may also elect to be taxed as a corporation instead of being taxed as a partnership.
Related Questions
- For IRS purposes, how do I classify a domestic limited liability company? Is it a sole proprietorship, partnership or a corporation?
- When is a limited liability company taxed as a partnership, and when is it taxed as a sole proprietorship?
- Can I convert my sole proprietorship or partnership to a limited liability company (LLC) or corporation?
