Choice of Entity: Tax Issues

by Practical Law Corporate & Securities

A Practice Note discussing the US federal income tax classification rules for US business entities, including C- and S-corporations, partnerships, and limited liability companies (LLCs). This Practice Note explains that an entity's state law classification does not always determine its federal tax treatment and outlines the available federal tax classifications, such as C-corporation, S-corporation, partnership, or disregarded entity. It provides a detailed overview of the check the box Treasury regulations, distinguishing between per se corporations and eligible entities that can choose their tax status. This Practice Note also examines the default tax rules for eligible entities, such as the treatment of single-member LLCs as disregarded entities and multi-member LLCs as partnerships. Furthermore, this Practice Note explores the requirements and potential tax consequences of electing S-corporation tax status, including the restrictions on S-corporation eligibility and the built-in gains (BIG) tax implications of converting from a C- to an S-corporation. For the US federal income tax classification rules that apply to foreign businesses, see Practice Note, Check the Box Rules for Foreign Businesses.