Lone Tree, Colorado
Footnotes · for the preparer’s desk
State law decides what an entity is. Federal tax law decides how it is taxed, and for most entities lets the owners choose.
The choice is made, or defaulted into, under the check-the-box regulations of 1997. The form is 8832. The traps are the dates and the deemed transactions.
This page is what to check before a client’s LLC files its first return, and before anyone checks a box.
Before 1997 the IRS classified unincorporated entities by counting corporate characteristics (the Kintner factors: continuity of life, centralized management, limited liability, free transferability — three of four made a corporation). Reg. §§301.7701-1 through -3 replaced that with an election. The rules are short; the consequences of getting a date wrong are not.
Reg. §301.7701-2(b). A per se corporation is taxed as a corporation and cannot elect otherwise.
Everything else that is a business entity is an eligible entity: LLCs, limited partnerships, general partnerships, LLPs, business trusts, and most foreign entities not on the list. An eligible entity with two or more owners may be a partnership or a corporation; with one owner, disregarded or a corporation. Those are the only choices.
↑ Back to top| Two or more owners | One owner | |
|---|---|---|
| Domestic eligible entity | Partnership | Disregarded (Schedule C, E or F of the owner; or a division of a corporate owner) |
| Foreign eligible entity | Partnership if at least one owner has unlimited liability; corporation if all owners have limited liability | Disregarded if the owner has unlimited liability; corporation if the owner has limited liability |
The default applies with no filing. A Colorado two-member LLC that never files anything is a partnership and owes a Form 1065 (with the §6698 penalty for not filing one). A single-member LLC is disregarded unless it elects. Spouses who co-own an LLC in Colorado are a partnership — the qualified joint venture election of §761(f) is not available to a state-law entity (see Partnership Defined).
A disregarded entity is still a separate entity for employment taxes and certain excise taxes (Reg. §301.7701-2(c)(2)(iv)–(v)): it files its own 941s under its own EIN.
↑ Back to topRev. Proc. 2009-41 — the Form 8832 analogue of Rev. Proc. 2013-30.
An eligible entity that missed the 75-day window may still get its intended effective date if: it has not filed a Form 8832 before; it has either not filed a return for the first year because the due date has not passed, or it (and every affected owner) has filed all returns consistently with the intended classification; it has reasonable cause for the failure; and it files the late Form 8832 (box checked for late relief, with an explanation signed under penalties of perjury) within 3 years and 75 days of the intended effective date. No user fee. Outside those conditions, a ruling request under Reg. §301.9100-3.
↑ Back to topReg. §301.7701-3(g). Checking a box is not a paperwork event; the IRS treats it as a transaction, and the transaction can be taxable.
| Change | Deemed to happen | Tax result |
|---|---|---|
| Partnership → corporation | The partnership contributes all assets and liabilities to a new corporation for stock, then liquidates, distributing the stock | Generally tax-free under §351/§721, but each partner’s share of liabilities is a deemed distribution; a partner with negative tax capital recognizes gain (§731). Appreciated property is now locked inside a corporation. |
| Corporation → partnership | The corporation liquidates (§331/§336), then the owners contribute the assets to a new partnership | Fully taxable at both levels: the corporation on appreciated assets, the shareholders on the liquidation. Rarely wise. |
| Disregarded entity → corporation | The owner contributes the assets to a new corporation (§351) | Generally tax-free; liabilities in excess of basis are gain (§357(c)). |
| Corporation → disregarded entity | The corporation liquidates into its owner | Taxable (§331/§336), unless the owner is a corporate parent (§332). |
Timing (Reg. §301.7701-3(g)(3)): the election is effective at the start of the chosen day; the deemed transactions occur immediately before the close of the day before. A January 1 effective date puts the deemed liquidation in the old entity’s December 31 year. The step-transaction doctrine applies to what the owners do around the election (Reg. §301.7701-3(g)(2)).
Where it goes wrong
A two-member real estate LLC with a refinanced building and negative capital accounts “becomes an S corporation” on an adviser’s say-so. The deemed contribution-and-liquidation treats each member’s share of the mortgage as a distribution; the member with negative tax capital has gain on the conversion date with no cash. Run the basis arithmetic first.
An LLC that wants to be an S corporation does not file Form 8832. A timely Form 2553 is treated as a Form 8832 electing corporate status effective the same day (Reg. §301.7701-3(c)(1)(v)(C)); if the S election later fails, the deemed corporate election stands and the entity is a C corporation. Late Form 2553 relief under Rev. Proc. 2013-30 covers the deemed 8832 as well. The late S election page has the procedure; the deemed transactions in Step 5 still occur, because the LLC is going from partnership or disregarded status to corporate status.
↑ Back to topPublicly traded partnerships (§7704): a partnership whose interests trade on an established securities market, or a substantial equivalent, is taxed as a corporation regardless of the check-the-box rules — unless 90% or more of its gross income is “qualifying income”: interest (not from a financial business), dividends, real property rents and gains, income and gains from minerals and natural resources, and gains on assets that produce such income. That exception is why the oil and gas MLPs clients hold still issue K-1s, and why those K-1s carry the passive-loss and §199A PTP rules.
Election out (§761(a)): an unincorporated organization may elect not to be treated as a partnership if it is used (1) for investment, not the active conduct of a business, (2) for the joint production, extraction or use of property without joint sale of the product, or (3) by securities dealers for a short-period underwriting — and only if each member’s income can be determined without computing partnership taxable income. The election is attached to the return for the first year it applies. Investment clubs are the common case.
↑ Back to topFile Form 2553 under Rev. Proc. 2013-30 with the late-election statement; it carries the deemed 8832. Confirm the LLC had no appreciated property or liabilities that make the deemed incorporation taxable.
It cannot elect for 60 months from the prior effective date without IRS consent or a more-than-50% ownership change — and even then the change is a taxable corporate liquidation. Usually the answer is to live with it.
Yes. Disregarded is the default; nothing needed to be filed. The LLC still has its own EIN for payroll.
By default it is a corporation if the owner has limited liability under the foreign law (almost always), which makes it a controlled foreign corporation with Form 5471 exposure. An election to be disregarded on Form 8832 is usually what the owner wanted; Form 8858 follows.
One line each, from the course study questions and the final exam; the bracketed tag is the question and the answer I derived.
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Written for the Tax Shop desk from my continuing-education course notes; figures are for the 2026 tax year unless stated. Items marked (verify) are to be confirmed against primary sources before they are relied on. Private reference, not client advice.