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LLC Taxes: A look at Tax Categories for the Most Prevalent Business Type

Updated: Jun 13

As the first of our series on business tax navigation, we will start with the entity type most common to small businesses- the famed LLC. This articles discusses Sub-S and Sub-K taxes for LLCs. We discuss Sub-C LLC's in our upcoming articles.



LLC Tax Options

1. Disregarded
2. Sub- C
3. Sub-S (but only if eligible)

Note: A single member LLC cannot choose a Sub K taxation because sub K in only available to unincorporated entities with 2 or more owners

What is Disregarded Entity Status?

A single-member LLC is considered a "disregarded entity" by default under the tax code. This means that the IRS does not treat the business as being separate and apart from its owner for tax purposes. Thus, the owner of a single member LLC reports their business income or losses along with any other personal income on their personal taxes. This is of course, as you learned earlier, unless the business opts into another category such as Sub S or C. This generally The distinguishing factor between disregarded entity status and other statuses is that income is combined with any personal income and taxed at the individual rate based on income brackets.


Sub-S Status

An LLC has to affirmatively file as an S-Corporation to be taxed under subchapter S of the tax code. The IRS sets special requirements to qualify for this status. A business must meet all of the following in order to meet these requirements.


What is needed for Sub-S status?
  • The business must be a domestic corporation meaning it must be incorporated or organized in one of the 50 states or DC.

  • The business must have less than 100 owners.

  • All of the owners are individuals, estates, certain trusts, or tax exempt organization.

  • The business only one class of ownership interest (excluding differences in voting rights).

When a business no longer meets any of the above standards for Sub-S classification, it automatically and immediately reverts back to the default classification under IRS rules. This is why the sub-S classification is called fragile. It can easily become lost.


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