For federal income tax purposes, an LLC isn’t its own tax category. The IRS treats every LLC as one of four things: a disregarded entity, a partnership, an S corporation, or a C corporation. Your LLC tax classification depends on how many owners the business has and whether anyone files an election to change the default. That single choice drives how much you pay in income and self-employment tax, whether you qualify for the 20% pass-through deduction, and how many returns you file each year.
The Default Classifications
Form an LLC and file nothing else with the IRS, and you get one of two default treatments based on member count.
A single-member LLC is a disregarded entity. The IRS ignores the LLC as a separate taxpayer and treats the business income and expenses as belonging directly to the owner, who reports profit or loss on Schedule C of Form 1040, the same way a sole proprietor would.1Internal Revenue Service. Single Member Limited Liability Companies2Internal Revenue Service. About Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship)
An LLC with two or more members defaults to partnership treatment. The LLC files Form 1065 as an informational return and issues each member a Schedule K-1 showing their share of profits, losses, deductions, and credits, which the members then report on their personal returns.3Internal Revenue Service. About Form 1065, U.S. Return of Partnership Income
Both defaults are pass-through structures. The business itself pays no federal income tax; the profit flows to the owners. These rules come from federal regulations classifying any domestic eligible entity with one owner as disregarded and any with two or more owners as a partnership, unless the entity elects otherwise.4eCFR. 26 CFR 301.7701-3 – Classification of Certain Business Entities
Electing S Corporation Treatment
Self-employment tax is usually why LLC owners look past the default. Under disregarded-entity or partnership treatment, all net business earnings are subject to the 15.3% combined self-employment tax (12.4% Social Security plus 2.9% Medicare).5Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) Elect S corporation treatment, and only the W-2 salary you pay yourself runs through payroll taxes. Distributions of the remaining profit do not.
The trade-off is the “reasonable salary” rule. Owner-employees of S corporations must pay themselves reasonable compensation before taking distributions. Set the salary too low and the IRS can reclassify distributions as wages and assess back taxes and penalties. Reasonableness turns on your role, hours, the company’s revenue, and what comparable businesses pay for similar work, with comparable market pay carrying the most weight in IRS and tax court analysis.
The election has real limits. An S corporation can have no more than 100 shareholders, all shareholders must be U.S. citizens or residents, and the entity can only have one class of stock. Small businesses rarely bump into these limits, but they become a wall if you want to bring on foreign investors or issue preferred stock.
To elect S status, the LLC files Form 2553 no later than two months and 15 days after the beginning of the tax year the election is meant to cover, or at any time during the preceding tax year. Every shareholder must consent.6Office of the Law Revision Counsel. 26 USC 1362 – Election; Revocation; Termination File after that deadline but before the 15th day of the third month of the following tax year, and the election applies to the following year instead.7Internal Revenue Service. Instructions for Form 2553
Whether the election saves money depends on the math. On an LLC earning $200,000 with a $100,000 reasonable salary, the self-employment tax savings on the remaining $100,000 in distributions can easily exceed $14,000 in a year. But if profit is modest enough that nearly all of it would go toward a reasonable salary anyway, the savings vanish and you’re left with the cost of running payroll.
Electing C Corporation Treatment
An LLC can also elect to be taxed as a C corporation by filing Form 8832.8Internal Revenue Service. Form 8832, Entity Classification Election A C corporation is a separately taxed entity: the business pays federal income tax on its profits at the flat 21% corporate rate, and shareholders pay tax again on any dividends they receive. This is the “double taxation” you’ll hear about.
Qualified dividends are taxed at preferential capital gains rates of 0%, 15%, or 20% depending on the shareholder’s income, which softens the second layer somewhat. Even so, the combined burden often exceeds what an owner would pay under pass-through treatment, particularly for smaller businesses that distribute most of what they earn.
C corporation treatment tends to make sense for businesses that plan to reinvest profits rather than distribute them, since retained earnings avoid the shareholder-level tax entirely. It’s also the preferred structure for venture-backed companies, which typically need multiple classes of stock and can’t live within the S corporation shareholder restrictions. The effective date of a Form 8832 election can go no more than 75 days before the filing date and no more than 12 months after.8Internal Revenue Service. Form 8832, Entity Classification Election
The Pass-Through Deduction You Give Up With C Corporation Status
Owners of LLCs taxed under any pass-through classification can claim the Section 199A qualified business income deduction, which allows a deduction of up to 20% of qualified business income.9Office of the Law Revision Counsel. 26 USC 199A – Qualified Business Income The deduction was set to expire after 2025 and was made permanent by the One Big Beautiful Bill Act signed in 2025. C corporations do not qualify.
The full 20% is available to owners whose taxable income falls below annually adjusted thresholds. Above those thresholds, the deduction phases out based on the W-2 wages the business pays and the value of its depreciable property, and it phases out completely for owners of specified service businesses like law firms, medical practices, consulting firms, and accounting practices. For an owner well below the thresholds, though, the deduction is straightforward: taxable income drops by 20% of business profit, a benefit that disappears entirely under C corporation treatment.
How to Change Your LLC’s Classification
The IRS uses two forms. Form 2553 handles S corporation elections. Form 8832 covers everything else, including electing C corporation status or switching between disregarded-entity and partnership treatment.8Internal Revenue Service. Form 8832, Entity Classification Election An LLC electing S status doesn’t need to file Form 8832 separately; Form 2553 handles both the corporate classification and the S election in one step.7Internal Revenue Service. Instructions for Form 2553
The 60-Month Lock
Once you file Form 8832 to change classification, you generally can’t change it again for 60 months from the effective date. The IRS may grant an exception if more than 50% of the ownership interests change hands between the two elections. An initial classification chosen when the LLC is formed doesn’t count as a change under this rule, so a newly formed LLC that elects C corporation status on day one can still switch later without waiting five years.4eCFR. 26 CFR 301.7701-3 – Classification of Certain Business Entities
Relief for Late Elections
Missing the Form 2553 deadline isn’t necessarily fatal. The IRS offers simplified relief for late S corporation elections when the failure was unintentional. To qualify, the entity must have intended to be an S corporation, every owner must have reported income consistently with S corporation treatment since the intended effective date, and the request must be filed within three years and 75 days of that date. If a late corporate classification election is also needed to take effect on the same date, the LLC must show that Form 8832 was the only thing preventing corporate status and that all federal returns were filed consistently with S corporation treatment.10Internal Revenue Service. Late Election Relief
State Treatment Usually Follows, but Check
Most states follow the federal classification. If your LLC is a partnership federally, the state generally treats it the same way, and the same goes for S and C corporation elections. A handful of states require a separate state-level filing to recognize S corporation status; skip it, and the state may tax the LLC as a C corporation even though the IRS treats it as an S corporation.
Some states also impose fees and taxes on LLCs regardless of federal classification, including annual registration fees, franchise taxes, or gross receipts taxes. Amounts vary widely, and some minimum franchise taxes apply even when the LLC earns nothing. If the LLC is formed in one state and does business in others, expect filing obligations in each.