One of the first things that members of your new Arizona LLC should do is consult with an experienced tax accountant to determine which of the four possible LLC federal income tax methods is best for your LLC and its members.
New LLCs can potentially be taxed four different ways under federal income law:
1. Sole proprietorship or disregarded entity if there is one member or two members who are married and own their interest in the LLC as community property. This is the default federal income tax method for single member LLCs, including LLCs that are owned solely by a revocable trust.
2. Partnership under subchapter K of the Internal Revenue Code of 1986 if the LLC has two or more members. This is the default federal income tax for multi-member LLCs.
3. C corporation under subchapter C of the Internal Revenue Code of 1986. The LLC must file an IRS Form 8832 to elect to be taxed as a C corporation. The election to be taxed as a C corporation can only go back 75 days from the date the IRS Form 8832 is filed with the IRS.
4. S corporation under subchapter S of the Internal Revenue Code of 1986. The LLC must file an IRS Form 2553 to elect to be taxed as an S corporation. To be taxed as an S corporation from beginning the date the LLC was formed all of the members must sign the IRS Form 2553 and file it with the IRS not later than 75 days after the LLC was formed. If an LLC fails to make a timely S election it can do so within the first 2.5 months of the beginning of each calendar year. There are requirements that must be met for an LLC to be taxed as an S corporation. For example, the LLC cannot be taxed as an S corporation if any member is an entity or if the LLC has more than 100 members.
One of the above-listed federal income tax methods is best for your LLC. If you understand federal income tax law you know what to do. Most people, however, are not federal income tax experts which is why they need to consult with an experienced tax accountant about which of the four methods is best for their LLC.
Consult with Your Accountant
We recommend that you consult with an experienced accountant within the first 75 days after the date the LLC was formed to determine if your LLC should file an election to be taxed as a C corporation or an S corporation and avoid the default federal income tax method.
For more on this important topic read former CPA Richard C. Keyt’s article called “How are LLCs Taxed?“
If you need a recommendation for an Arizona CPA see our CPA recommendations on the Professionals We Like page on our website.