What is Entity Classification Election?

The Entity Classification Election allows eligible businesses to choose how they will be classified for federal tax purposes. This election is made using Form 8832 and can determine whether a business is treated as a corporation, partnership, or disregarded entity. Additionally, businesses that qualify as S Corporations can make an election using Form 2553 to obtain that status. The classification affects how income is taxed, the types of tax forms required, and overall liability.

Who Can Apply for Entity Classification Election?

Any eligible business entity can apply for an Entity Classification Election. This includes:

• Limited Liability Companies (LLCs): LLCs have the flexibility to choose how they want to be taxed—either as a sole proprietorship, partnership, or corporation.

• Partnerships: Partnerships may elect to be treated as corporations if they wish.

• Corporations: Existing corporations may choose to change their classification for tax purposes.

• Sole Proprietorships: Single-member LLCs can elect to be treated as corporations.

Types of Entity Classification

1. Disregarded Entity: A single-member LLC can choose to be treated as a disregarded entity, meaning it is not considered separate from its owner for tax purposes. Income is reported on the owner’s personal tax return.

2. Partnership: Multi-member LLCs or partnerships can elect to be classified as partnerships, allowing pass-through taxation where income is taxed at the individual partners' rates.

3. C Corporation: Businesses may choose to be taxed as a C Corporation, which subjects the entity to corporate income tax. This can be beneficial for certain growth strategies and reinvestment options.

4. S Corporation: Eligible corporations may elect to be treated as an S Corporation using Form 2553, allowing income to pass through to shareholders without being subject to corporate tax.

How to Apply for Forms 8832 and 2553

• Form 8832:

• Who Can Apply: Any eligible business entity, including LLCs, partnerships, and corporations.

• How to Apply: Complete Form 8832 and submit it to the IRS. This form can be submitted at any time, but it must be filed by the 15th day of the third month after the beginning of the tax year for which the election is to take effect.

• Approval: If approved, the entity will be classified as requested.

• Form 2553:

• Who Can Apply: Corporations (including LLCs electing S Corporation status) that meet specific requirements, including being a domestic corporation and having allowable shareholders.

• How to Apply: Complete Form 2553 and submit it to the IRS. This form must be filed by the 15th day of the third month of the tax year the election is to take effect.

• Approval: Approval of Form 2553 grants S Corporation status, allowing the corporation to enjoy pass-through taxation.

Differences Between Forms 8832 and 2553

• Purpose:

• Form 8832 is for electing how an entity will be classified for federal tax purposes (C Corporation, partnership, etc.).

• Form 2553 is specifically for electing S Corporation status.

• Eligibility:

• Form 8832 can be used by various entities, including LLCs and partnerships.

• Form 2553 is limited to domestic corporations and certain LLCs meeting specific criteria.

• Tax Treatment:

• Form 8832 allows for various classifications, including C Corporation and partnership taxation.

• Form 2553 provides the benefits of S Corporation taxation, allowing income to be passed through to shareholders.