Every new LLC owner must think about tax classification and has a variety of options. Unlike other similar business forms, LLCs allow members the flexibility of choosing to be taxed as a corporation. The three main tax classification options for an LLC are corporation (with S corporation or C corporation as two sub-options), partnership, and disregarded entity.
When selecting a classification (or going with the default you’ve been given), you will want to think about the maintenance requirements, management structure, and cost of forming the business in addition to asset protection. In some cases, working with an attorney during the formation of your business will be helpful.
How LLCs are Taxed in Arizona
- LLC members may choose to pay taxes as a corporation
- Some classifications occur by default, and others require that you file forms with the IRS
- The best classification for you depends on your financial plans, business goals, and the size of the company
- An experienced business attorney can help answer your LLC-related questions and make sure you follow state and federal laws
The IRS taxes LLCs, by default, based on how many owners there are. Each type of taxation we will cover is considered a “default,” so you don’t have to take any steps to receive the classification. You will just need to tell the IRS the number of LLC members when you apply to get an EIN. Let’s look at the classifications based on members below.
Disregarded Entity
An LLC with one member in Arizona will be classified as a disregarded entity. If the owner is an individual, the IRS will treat it like a sole proprietorship. If the owner of the LLC is another company, it will be taxed like a division or branch of the parent company.
LLC/Sole Proprietorship
For this type of taxation, the LLC owner will report and pay taxes using Form 1040 (personal tax return). You will likely use a Schedule C to report the losses and profits from your business, and additional Schedules and Forms in some cases.
LLC/Partnership
If your LLC has at least two members, it will be treated like a partnership for tax purposes. For this classification, the LLC must file its own federal return (Form 1065) as a tax-reporting entity and each member will receive a K-1 and must report their share of the company profits.
Your personal assets will still be protected despite how the IRS taxes the LLC. Remember that an LLC is a separate legal entity from the people who own it. The IRS may tax your LLC like a partnership or sole proprietorship, but that doesn’t mean it is a partnership or sole proprietorship.
S-Corp and C-Corp Classifications
You can request to be taxed like a corporation (as an S-Corp or a C-Corp) instead of going with the default classification given by the IRS.
C-Corp Classification
C-Corps face double taxation and, therefore, aren’t very commonly chosen. You should only choose this option if you have large healthcare expenses or a big company that needs to raise money.
S-Corp Classification
The S-Corp election is more popular for people who want to save money filing self-employment taxes. If your business is new and hasn’t earned much profit yet, this classification may not make much sense for you.
Again, if you don’t take action, the IRS will give you a default classification. By default, LLCs with more than one member are classified as partnerships for tax purposes, while those with a single member will be treated like a disregarded entity or sole proprietorship.
How Working With an Attorney Can Help
When you’re starting your small business, choosing which legal entity it should take is a must. There are a number of important factors to consider for making this choice, including the number of members the LLC has and the tax advantages and liability risks associated with the legal structure you choose. A skilled business attorney can help you with the formation of your LLC to minimize risks and maximize benefits.
As a small business owner, you must have at least a basic understanding of the laws that dictate how the company must be run. Hiring independent contractors or employees, for example, will require an understanding of Arizona labor laws. Having an experienced legal expert to guide you during this process can be extremely helpful.
FAQ on LLC Tax Classification
Below are some of the most commonly asked questions related to an LLC tax classification in Arizona:
Q: What are the rules for acquiring a corporate name?
In Arizona, a corporation’s name must include the word “Limited,” “Incorporated,” “Company,” “Corporation,” or “Association,” or a suitable abbreviation. The name must not include language that implies or states that the corporation will be fulfilling an unlawful purpose. Make sure you’re aware of all the rules for acquiring a corporate name before you begin.
Q: Do I need to get an EIN from the IRS for my LLC?
If your LLC has employees, you must have an EIN. However, even if you don’t have employees, you may still want to get one. The LLC may require an EIN for certain business-related tasks, such as working with wholesale companies or opening a business account.
Q: Who has to cover taxes for an Arizona LLC?
LLC members will be responsible for income taxes since the tax responsibility is passed onto them. However, you may choose to be taxed in a different way and pay income taxes as a corporation with Form 2553.
Q: Are LLCs in Arizona required to file an annual report with the state?
No. While other states require an annual filing with tax information included, the Arizona Corporation Commission does not.
Q: Do you have to keep corporate records as an Arizona LLC?
Even if you choose for your LLC to be taxed as a corporation, there are no legal requirements for maintaining corporate records in this case.
What to Do if You Need Help with LLC Matters
Many Americans have a dream of starting their own small business, but this task comes with numerous legal implications to think about. Our business attorneys have extensive experience on matters regarding employment, tax matters, business, and more. Call today and get answers to your questions on LLC tax classification.
Call JacksonWhite’s Small Business Law Team at (480) 464-1111 to discuss your case today.