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What is federal tax classification? The Internal Revenue Service (IRS) has six primary ways a business can be classified for tax purposes: sole proprietorship, partnership, C corporation, S corporation, limited liability company (LLC), and nonprofit. Guide to Federal Tax Classifications for Business Owners - Shopify shopify.com blog federal-tax-classification shopify.com blog federal-tax-classification
By default, LLCs are classified based on the number of members (owners). A single-member LLC is treated as a sole proprietorship and classified as a disregarded entity by the IRS, while a multi-member LLC is taxed as a partnership. How to Choose a Tax Classification for LLC | ZenBusiness Inc. ZenBusiness tax-classification-for-llc ZenBusiness tax-classification-for-llc
Specifically, a domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and affirmatively elects to be treated as a corporation.
Corporations are taxed as C-corps by default, but some corporations can elect S-corp taxation instead. LLCs are typically taxed as sole proprietorships or partnerships, but they can also choose to be taxed as C-corps or S-corps.
S Corporation: An LLC can choose to be taxed as an S Corporation by filing an election with the IRS. This allows the business to avoid double taxation and provides the owners with the benefits of a corporation. C Corporation: An LLC can also choose to be taxed as a C Corporation, which is a separate taxable entity. Attorney Explains LLC Tax Classifications: Sole Proprietorship Bethel Law blog attorney-explains- Bethel Law blog attorney-explains-
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Advantages of S corp election The main reason to prefer S corporation tax treatment over partnership treatment has to do with employment taxes. Under the Code, an owner of a business taxed as a partnership who is employed by the business is considered an owner.
Corporations are taxed as C-corps by default, but some corporations can elect S-corp taxation instead. LLCs are typically taxed as sole proprietorships or partnerships, but they can also choose to be taxed as C-corps or S-corps. C-corp Vs. S-corp: Which Business Structure Is Right For You? - Forbes forbes.com advisor c-corp-vs-s-corp forbes.com advisor c-corp-vs-s-corp
The best classification for the LLC and its owners will depend on a number of factors like business size, members goals, and financial plans for the LLC. Most people consider personal asset protection, formation cost, management structure, and maintenance requirements when making this decision.

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