# Limited liability company (LLC)

> A state-law shield with no federal tax category of its own: disregarded, a partnership, or a corporation by election.

Source: https://lopifi.com/learn/business-entity-types-explained/llc
Part of: Lopifi — US GAAP books on autopilot, checked by a CPA (https://lopifi.com)

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**What is an LLC, and how is an LLC taxed?** A state-law shield with no federal tax category of its own: disregarded, a partnership, or a corporation by election.

A [limited liability company](https://lopifi.com/md/glossary/limited-liability-company) is a state-law entity: you file formation papers with a state, and the members are shielded from its debts the way shareholders are. For federal tax it has no category of its own. It takes whichever classification it qualifies for by default or chooses: a [disregarded entity](https://lopifi.com/md/glossary/disregarded-entity) with one member, a partnership with two or more, or a corporation if it elects one.

> “A few types of businesses generally cannot be LLCs, such as banks and insurance companies. … 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. For income tax purposes, an LLC with only one member is treated as an entity disregarded as separate from its owner, unless it files Form 8832 and elects to be treated as a corporation.”

— [IRS, Limited liability company (LLC)](https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc), How the IRS classifies an LLC

> “unless the entity elects otherwise, a domestic eligible entity is— (i) A partnership if it has two or more members; or (ii) Disregarded as an entity separate from its owner if it has a single owner.”

— [Treas. Reg. §301.7701-3(b)(1)](https://www.law.cornell.edu/cfr/text/26/301.7701-3), Default classification of a domestic eligible entity — the check-the-box rules

| Members | Elections | Taxed as | Federal return |
| --- | --- | --- | --- |
| One | None | Disregarded entity | The owner's — Schedule C for an individual |
| Two or more | None | Partnership | Form 1065, K-1 to each member |
| Any | Form 8832, corporation | C corporation | Form 1120 |
| Any eligible | Form 2553 | S corporation | Form 1120-S, K-1 to each member |

One LLC, four possible tax lives.

> **Disregarded is not invisible.** A single-member LLC is ignored for income tax, but it is still a separate entity for state law, its own bank account, and payroll: the regulations treat it as a corporation for employment taxes, so it gets its own EIN and is the employer of anyone it pays wages.

> “is treated as a corporation with respect to taxes imposed under Subtitle C”

— [Treas. Reg. §301.7701-2(b)(1), (c)(2)(iv)](https://www.law.cornell.edu/cfr/text/26/301.7701-2), Incorporated entities are corporations per se; a disregarded entity is still the employer for employment taxes

Its books look like a partnership's. Instead of common stock and [retained earnings](https://lopifi.com/md/glossary/retained-earnings), each member has a capital account. Here is Northwind's first entry if the founders had formed an LLC: the same $60,000, credited to two members' capital accounts instead of common stock.

**Single-member LLC (disregarded)**
- Pro: Liability shield with the owner's own return.
- Pro: No separate federal income tax return.
- Con: Self-employment tax on all of the profit.
- Con: Some states tax the LLC itself — California's $800 a year.
- Best for: A solo business that wants a liability shield and no corporate return.

**Multi-member LLC (partnership)**
- Pro: One layer of tax.
- Pro: Flexible allocations written in the operating agreement.
- Pro: Losses pass through to the members.
- Con: Every member gets a K-1, and their own return waits on it.
- Con: Can't grant incentive stock options or issue QSBS.
- Con: A venture fund investing in one meets the tax problems the Delaware C corporation lesson describes.
- Best for: Co-owned services firms, real estate, holding companies.

An LLC, by what it's taxed as.

> “Limited partnerships have only one general partner with unlimited liability, and all other partners have limited liability. … Limited liability partnerships are similar to limited partnerships, but give limited liability to every owner.”

— [SBA, Choose a business structure](https://www.sba.gov/business-guide/launch-your-business/choose-business-structure), Choose a business structure — the SBA's overview of the options

## Where this page's rules come from

- [IRS, Limited liability company (LLC)](https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc) — How the IRS classifies an LLC (irs)
- [Treas. Reg. §301.7701-3(b)(1)](https://www.law.cornell.edu/cfr/text/26/301.7701-3) — Default classification of a domestic eligible entity — the check-the-box rules (regulation)
- [Treas. Reg. §301.7701-2(b)(1), (c)(2)(iv)](https://www.law.cornell.edu/cfr/text/26/301.7701-2) — Incorporated entities are corporations per se; a disregarded entity is still the employer for employment taxes (regulation)
- [SBA, Choose a business structure](https://www.sba.gov/business-guide/launch-your-business/choose-business-structure) — Choose a business structure — the SBA's overview of the options (agency)
- [Wikipedia, “Limited liability company”](https://en.wikipedia.org/wiki/Limited_liability_company) — Limited liability company (reference)

- **Track:** [Entity types](https://lopifi.com/md/learn/entities)
- **Part of:** [The entity menu](https://lopifi.com/md/learn/business-entity-types-explained) — 5 min
- **Terms taught:** [Limited liability company](https://lopifi.com/md/glossary/limited-liability-company), [Disregarded entity](https://lopifi.com/md/glossary/disregarded-entity), [Check-the-box election](https://lopifi.com/md/glossary/check-the-box-election)
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- **The course:** https://lopifi.com/md/learn