What Is an LLC?

An LLC, similar to a corporation, is a type of business entity that is created based on state law.

One similarity between LLCs and corporations is that both provide liability protection to the owners and members. However, a major difference is that LLCs tend to have less start-up costs and less formality is required.

Business owners can form an LLC by filing the Articles of Organization. The Articles of Organization should include the address and name of the business in addition to the names of all the owners.

You also have the option of writing an operating agreement. The purpose of the operating agreement is to establish a set of requirements for how LLC members interact with each other and run the business. It may be advantageous to draft an operating agreement because:

  • Operating agreements often detail how owners can exit the LLC or sell their membership interest.
  • Most states require LLC members to write and file an operating agreement to form their company.
  • In some states, the law requires LLCs to file not just the operating agreement but also corporate bylaws.
  • Operating agreements include information about how the owners of the LLC will divide their profits and earnings and pay for the losses or debts of companies.

State legislature made the LLC model to allow small companies to form businesses that enjoy the same legal protections as shareholders and corporate owners. LLCs offer members or owners the tax structure of the typical partnership and the liability protection enjoyed by the typical corporation.

LLC Tax Election

LLCs aren't viewed as tax entities when it comes to tax purposes federally. This fact distinguishes LLCs from many other business structures.

Due to this, LLCs are required by the IRS to create a tax election during the process of formation. Owners can use Form 8832 to tell the IRS how they want the LLC to be taxed. An LLC can be taxed as either a corporation or a partnership.

LLCs tend to choose to be taxed as a partnership. The reason for this is that it allows the losses and profits of the business to go through the personal taxes of the members. If you decide to have your LLC taxed as a corporation, the profits of your business will be taxed at both the corporate and the individual level. 

While the federal tax code permits LLCs to choose their tax treatment, there are certain instances in which an LLC cannot choose their tax treatment. For example, whether an LLC is multi-member or single member has an impact on federal tax treatment.

Multi-member LLCs can choose to be taxed as a corporation or as a partnership.

Changing the Tax Election

If you change your LLC from multi-member to single-member, this could have major consequences when it comes to taxes. Some things to keep in mind when considering changing your LLC from multi-member to single-member are:

  • Your LLC will no longer be eligible for federal tax treatment as a partnership. Only multi-member LLCs can be taxed as a partnership.
  • Single-member LLCs can still choose to be taxed as a separate entity. In this case, the losses and profits are passed through to the single owner. 
  • Your LLC can be taxed as a corporation. When the other members of your LLC leave, you will need to file a tax election form to determine whether you want to be taxed as a corporation or individual. 
  • Choosing to be taxed as a corporation or individual will not have an impact on liability protection.
  • If your LLC changes from multi-member to single-member, the IRS will view this change as the termination of a partnership. Therefore, it will be as if you turned your partnership into a sole proprietorship. 
  • Your LLC can continue to operate as normal. The only major change will be how the IRS treats your LLC in terms of taxes. 
  • You won't need an Employer Identification Number because only multi-member LLCs need EINs. 

How to Change from Multi-Member LLC to Single-Member LLC?

If you need help with multi-member LLC to single-member LLC, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.