One of the most popular corporate structures is the LLC because the governing law provides a lot of flexibility to a business owner or owners in determining how the LLC will be managed, controlled and taxed. An LLC may be classified for federal income tax purposes as a partnership, corporation, or an entity disregarded as separate from its owner for tax purposes. The LLC’s classification is determined by the entity’s written and detailed operating agreement. Within this document, the entity sets forth the specifications regarding its organization structure, including how the owner or owners (known as “members”) will control and manage the entity.
The LLC business structure offers a number of ways the business can be treated for tax purposes as follows:
An LLC with a single member (owner) will be classified as a “C” corporation and can elect to have the entity disregarded from its owner for federal income tax purposes by filing Form 2553 with the IRS. An entity disregarded as separate from its owner will still be required to pay employment taxes for any employees and other taxes, as appropriate, however, the entities’ income, deductions, gains, losses, and credits are reported on the owner’s personal tax return.
Likewise, an LLC with at least two members can elect to be classified as a “C” corporation by filing Form 8832 with the IRS. If this election is not made, the IRS by default will classify the LLC as a partnership for federal income tax purposes. Or an LLC with more than one member can elect to be classified as a partnership and is subject to the same filing and reporting requirements as partnerships formed under state law. The entities’ income, deductions, gains, losses and credits are reported on the owner’s personal tax return. The entity will be required to pay employment taxes for any employees of the business which are separate and distinct from the owners.
In New York, every Limited Liability Company must announce its formation by placing notices in two publications for six weeks, at a cost of up to two thousand dollars. Failure to properly publish can result in a penalty which includes a suspension of a noncompliant LLC’s right “to carry on, conduct or transact any business” in New York. Initially it was difficult to discern what this actually meant, because the law would enacted did not explicitly impair the LLC’s right to contract, or the right of other parties to sue the LLC. Furthermore, the statute states that suspension will not “result in any member, manager, or agent of such limited liability company becoming liable for the contractual obligations or other liabilities of the limited liability company.”