LLC Roadmap

NOTA BENE: In the summer of 2006 IRS changed the instructions of Form 2553. IRS now asserts that it is not necessary to file Form 8832 if you file Form 2553. That makes the information here mostly obsolete, except that the "FILED PURSUANT TO" information may still be valid.

  1. The author of this article is not particularly fond of LLC's.
    1. A practical problem with an LLC is that so often when they are formed, the individual, his lawyer, or his accountant (unless the accountant is one of us) does not tend to federal matters. There is a lot of "catching up" that needs to be done at the end of the year.
    2. This article is a "road map" of what was supposed to be done.

  2. Form the Limited Liability Corporation with your state Secetary of State.

  3. If you do nothing:
    1. If you are the sole owner, IRS will automatically assume that you are a Schedule C sole proprietor.
      1. The only advantage that you have over a "normal" Schedule C sole proprietor is that you have limited liability protection.
      2. You file Schedule C, Schedule SE, and any other applicable self-employment forms as any other sole proprietor would.
    2. If there are two or more owners, IRS will automatically assume that you are a partnership.
      1. File Form 1065.
    3. CLARIFICATION: If you want to be treated as a sole proprietorship or as a partnership, then the proper course of action is to do nothing.

  4. You cannot "jump" from LLC all the way to S-Corporation. If you attempt to do so, IRS will send you a letter telling you to take the following steps.
    1. File Form 8832.
    2. Write "FILED PURSUANT TO REV. PROC. 2002-59" across the top.
    3. Attach a statement explaining reasonable cause for not having filed Form 8832.
    4. Mail Form 8832 to IRS Philadelphia PA 19255-0046.
    5. This must be done by the due date of the return for the first tax year.
    6. After receiving the acceptance letter as a corporate entity, file Form 2553.
    7. If this forces you to file Form 2553 after the due date for that form, see "If the due date of the Form 2553 has passed, then do this" below.

  5. If you want your LLC to be treated as a corporation, you must file Form 8832, Entity Classification Election.
    1. If you do not already have a federal ID number, get one with Form SS-4.
      1. To save time, suggest that you have the taxpayer phone it in to (866) 816-2065 to get the number immediately.
      2. Check "Corporation" on line 8a and write in either "1120" or "1120S."
    2. When you have the federal ID number, next fill in Form 8832 Entity Classification Election.
      1. Check box 1a "Initial classification by a newly-formed entity."
      2. Check box 2a "A domestic eligible entity electing to be classified as an association taxable as a corporation."
      3. Skip line 3.
      4. Enter the date the LLC was formed on line 4.
      5. All "members" of the LLC must sign the Consent Statement.
      6. Mail the form to Internal Revenue Service Philadelphia PA 19255, regardless of which state you are filing from.

  6. You have the same 2-1/2 months as with the S-election to file Form 8832.
    1. You have until 75 days after the effective date to file Form 8832.
    2. If the date that you discover Form 8832 should be filed is more than 75 days after the effective date you want, then file Form 8832 but do this:
      1. Write "FILE PURSUANT TO REV. PROC. 2002-59" across the top of the form.
      2. Attach a statement that says the following:
        1. The entity failed to obtain it's desired classification election solely because Form 8832 was not timely filed,
        2. The due date for the entity's desired classification tax return (excluding extensions) for the tax year beginning with the entity's formation date has not passed, and
        3. the entity has reasonable cause for its failure to make a timely election.
    3. Wait for an acceptance letter from the IRS that you have successfully make the election for the entity to be treated as a corporation.

  7. After being accepted as a corporation, file Form 2553 to make the S-election.
    1. Fill out Form 2553 as you would any Form 2553.
    2. Form 2553 is due by the 15th day of the third month after the corporation is formed.

  8. If the due date of the Form 2553 has passed, then do this:
    1. Prepare Form 2553 as usual.
    2. Write "FILED PURSUANT TO REV. PROC. 98-55" across the top.
    3. Attach an explanation explaining why the form was not filed on time.
    4. Thinking that Form 2553 was not necessary for an LLC filing Form 8832 is sufficient.
    5. If the taxpayer thought that the attorney who formed the corporation had filed Form 2553, that is a better explanation.