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Capital Absorption Opportunity · Business entity forms

Limited Liability Companies, Including Series and Single-Member Disregarded Entities (LLCs)

Definition

A limited liability company is a state-law entity whose members are generally shielded from its debts; no federal statute creates it, and Treasury regulations decide how it is taxed.[4] Unless it elects otherwise, an LLC with two or more members is taxed as a partnership,[2] and a single-member LLC is disregarded as separate from its owner.[3]

Federal law

Formed under state law. No Act of Congress creates it; the federal laws below apply to it as described.

  1. Internal Revenue Code of 1954, Pub. L. 83-591, ch. 736, § 7701, 68A Stat. 911. Defines "partnership" for federal tax purposes to include unincorporated organizations carrying on business that are not trusts, estates, or corporations (26 U.S.C. § 7701(a)(2)); does not create LLCs. Official text: govinfo.gov, U.S. Government Publishing Office.
  2. Internal Revenue Code of 1954, Pub. L. 83-591, ch. 736, § 701, 68A Stat. 3, 239. Provides that a partnership is not itself subject to income tax; partners are taxed in their individual capacities (26 U.S.C. § 701), which governs multi-member LLCs taxed as partnerships. Official text: govinfo.gov, U.S. Government Publishing Office.

Federal regulations

Rules issued by federal agencies under the laws above.

  1. Business entities; definitions, 26 CFR 301.7701-2 (Internal Revenue Service, Department of the Treasury). Classifies a single-owner business entity as a corporation or disregarded; a disregarded entity's activities are treated like a sole proprietorship, branch, or division of the owner. Official text: govinfo.gov, U.S. Government Publishing Office.
  2. Classification of certain business entities, 26 CFR 301.7701-3 (Internal Revenue Service (Department of the Treasury)). "Check-the-box" rules: default classification of a domestic eligible entity (partnership if two or more members; disregarded if single owner) and the election to be taxed as an association (corporation). Official text: govinfo.gov, U.S. Government Publishing Office.