Corporate Tax and Sub-S Election for LLCs and Filling Out Form 2553

Either Single Member LLCs or Multi-Member LLCs may 1) choose corporate taxation and 2) elect Sub-S status.

The fastest place to find authority for this pronouncement is the IRS Instructions for Form 2553 (Rev. October 2001)(Election by a small Business Corporation). The third full paragraph on the first page of the instructions states:

"A limited liability company (LLC) must file Form 8832, Entity Classification, to elect to be treated as an association taxable as a corporation in order to elect to be an S corporation."

Also look at the IRS Instructions for Form SS-4 (Rev. December 2001)(Application for Employer Identification Number) where the proposition is not stated directly but discussed as a matter of fact.

First, the seventh full paragraph of page 4 of the SS-4 Instructions states LLCs automatically have two "default" tax calcifications, single member LLCs are "disregarded" entities and multi-member LLCs are "partnerships". However, "A domestic LLC may file Form 8832 ("Entity Classification") to avoid either default classification and elect to be classified as an association taxable as a corporation." Id. (emphasis added). Thus LLCs, single and multi-membered, may choose to be taxed as corporations if they file Form 8832.

Second, the eighth full paragraph of page 4 of the SS-4 Instructions states, "[I]f the LLC will be electing S Corporation status, it must timely file both Form 8832 and Form 2553". Id. Thus LLCs, both single and multi-member, after choosing corporate tax (rather than their default tax classifications) may elect Sub-S status by then filing Form 2553.

Filling out Form 2553 ("Election By a Small Business Corporation") - Another issue about Sub-S LLCs is how to fill out Form 2553. I do it as part of the LLC Package and as included in the Fees and Costs but I do get asked about it from time to time.

As LLCs do not have stock (unless the LLC Operating Agreement specifically provides for stock which I do not recommend), the "number of shares" box on the Form 2553 is answered with the percentage of the owners' LLC ownership interests which in a single member LLC would be 100% and "100%" is what I write (I used to write "there is no stock this is an LLC" but a percentage is easier, acceptable, and really what the IRS wants to know).

There are other pages in this site dealing with facets of this tax issue: Corporate Tax and S-Corp Status Language in the LLC Operating Agreement; IRS Form 8832; IRS Form 2553; Initial Report of Corporation; and IRS Form SS-4.

When I organized "Form" LLCs I did not organize LLCs taxed as corporations.

"Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose the pattern which will best serve the Treasury; there is not even a patriotic duty to increase one's taxes." Judge Learned Hand, Helvering v. Gregory, 69 F.2d 809, 810 (2d Cir. 1934).