¶ 3901
Overview
Scope of the chapter. This chapter opens Part VIII, which examines the federal and state taxation of LLCs. Its subject is the question that precedes every other tax question an LLC presents: how the federal tax law classifies the company. An LLC is a creature of state or foreign law, and the Internal Revenue Code says nothing about LLCs as such. The Code defines partnerships and corporations, and the Treasury regulations issued under section 7701 sort every organization into one of a small number of federal categories. An LLC may be classified as a partnership, as a corporation (an "association" in the regulations' vocabulary), or, if it has one owner, as an entity disregarded as separate from that owner. Since January 1, 1997, the classification of most LLCs has turned on the number of their owners, the liability of those owners under the law of formation, and any election the company has filed. Treas. Reg. §§ 301.7701-1(f)(1), 301.7701-3(a)–(c). The chapter examines those rules, the exceptions to them and the consequences of changing classification.
Why classification comes first. Classification decides which body of tax law governs the company and its owners. A company classified as a partnership is governed by subchapter K, which taxes its owners on their distributive shares of its income whether or not that income is distributed. A company classified as a corporation is governed by subchapter C, or by subchapter S if it makes a valid S election, and its owners are taxed on distributions as shareholders. A company that is disregarded is treated "in the same manner as a sole proprietorship, branch, or division of the owner." Treas. Reg. § 301.7701-2(a). The choice affects the rate of tax, the timing of tax, the treatment of contributions and distributions, the availability of basis adjustments, self-employment tax, the reporting obligations of the company and its owners, and the consequences of a later sale or liquidation. Because a change of classification is itself a taxable event in many cases, the initial classification of an LLC should be chosen deliberately at formation, with an eye to the business's likely course.
Organization. The chapter proceeds in nine parts:
- the history of entity classification, from the corporate-resemblance test of Morrissey v. Commissioner through the four-factor regulations to the elective regime adopted in 1996, and the validity of that regime (¶ 3910);
- the threshold question whether an arrangement is an entity separate from its owners at all (¶ 3920);
- the line between trusts and business entities (¶ 3930);
- the business entities that are corporations by definition and cannot elect (¶ 3940);
- the default classifications of eligible entities, domestic and foreign (¶ 3950);
- the making of elections on Form 8832, the limits on changing classification, deemed elections and relief for late elections (¶ 3960);
- the tax consequences of an elective change and of a change in the number of members (¶ 3970);
- the scope of disregarded-entity treatment and the purposes for which a disregarded LLC is treated as separate (¶ 3980); and
- series LLCs, foreign LLCs, hybrid entities, DAO LLCs and state taxes, followed by a decision table and an election checklist (¶ 3990).
Relation to other chapters. The history of LLC statutes, and the role the classification regulations played in the spread of the LLC, are examined supra ch. 1. The comparison of the LLC with corporations, partnerships and statutory trusts, including their federal tax treatment, is examined supra ch. 4. Single-member LLCs are examined supra ch. 9, and the federal tax status of a series of a series LLC supra ch. 10, ¶ 1080. The partnership tax rules that govern an LLC classified as a partnership are examined infra chs. 40 and 41. The tax treatment of disregarded entities is examined infra ch. 42, and the S election infra ch. 43. Non-U.S. LLC statutes, including the classification of Nevis, Belize, Cook Islands and Marshall Islands LLCs, are examined infra ch. 54, ¶ 5480.
Sources. The regulations discussed are Treas. Reg. §§ 301.7701-1 to -4 in the text current on the Electronic Code of Federal Regulations in November 2026, including the amendments made through T.D. 10039 (Dec. 16, 2025). The preambles to the 1996 proposed and final regulations, the revenue rulings and revenue procedures discussed, and the current Form 8832 and its instructions (Rev. December 2013) were read in their published text. Statutory provisions are cited to the Internal Revenue Code as amended through Pub. L. 119-21 (July 4, 2025). The decisions discussed were read in full text.