LLC Taxation

LLC Taxation

Overview of Federal Taxation of LLCs

LLCs do not have their own federal income tax classification.  As such, an LLC has options in how it will be classified for federal tax purposes.   Tax flexibility is one of the benefits of an LLC.  You can read more about the benefits of an LLC on our Texas LLC formation page.

The LLC’s federal tax classification options are:

  1. Sole Proprietorship/Partnership (the default/standard classifications);
  2. S-Corporation; or
  3. C-corporation.

The Sole Proprietorship, Partnership and S-Corp classifications are considered “pass-through” structures which means the profits pass through to the owners, and the LLC's owners (not the LLC) will have the income tax burden.

Standard Federal Tax Classifications

Unless you file a tax election with the IRS (see below), a single owner LLC will be taxed like a Sole Proprietorship and a multiple owner LLC will be taxed like a Partnership. The majority of LLCs will be taxed under these standard tax classifications. Let's take a deeper look:

Tax Elections/Options

An LLC can opt out of the standard tax classifications by filing a tax election with the IRS within 75 days after the date in which the LLC is registered. The two optional tax elections are discussed below:

Disclaimer: We are not CPAs nor tax professionals and nothing in this article or on this site should be considered as tax, accounting, or legal advice. Every LLC’s tax situation is different, and tax situations change over time as a company grows and becomes more profitable. Be sure to discuss with a tax professional before you make any decisions on the tax classification of your new LLC or change the tax classification of your existing LLC.

Zachary Copp, Esq.

Attorney at The Copp Law Firm

Mr. Copp is a graduate of the University of Texas at Austin and the founder of The Copp Law Firm. He has personally formed over 3,000 Texas LLCs since 2015 and was recognized as a Rising Star by SuperLawyers® for seven straight years. See full bio →