If you create a single-member LLC, it will not be taxed as a separate entity, like a regular corporation, unless you elect to have it taxed in this manner. Normally, you won?t choose corporate-style taxation, preferring to have your single-member LLC report its profits (or losses) on Schedule C of your personal return, just as a sole proprietorship would.

Similarly, if you have an LLC with two or more members, it will be treated as a partnership for tax purposes, with each partner reporting and paying income tax on her share of LLC profits unless you elect to have the LLC taxed as a corporation. Again, you normally won?t elect to do this, preferring to have your multi-member LLC follow the partnership tax route. This means that the LLC will report its income (or loss) on Form 1065, an informational return that notifies the IRS of how much each member earned (or lost). Each member will then report his or her share of profits or losses on her personal Form 1040.

Occasionally, the members of an LLC will conclude that there?s an advantage to being taxed like a corporation, with two levels of tax?one at the business entity level (for company profits) and another at the owners? personal income tax level (for salaries and dividends). LLCs that are taxed like corporations are able to split monies between business owners and the business itself, resulting in some situations in a significant overall tax saving.

If, after reviewing all the financial implications?and perhaps seeking the advice of a tax pro?you decide to elect corporation-style taxation, you?ll do this by filing IRS Form 8832, Entity Classification Election. Where the LLC has two or more members, they can all sign the form or authorize one member or manager to sign.

Electing to have your LLC taxed as a corporation can be advantageous if you want to receive tax-free fringe benefits from the business. If you follow the usual practice of having pass-through taxation for your LLC?meaning that the business isn?t taxed as a separate entity?then as a business owner you?ll be taxed on the value of the fringe benefits you receive from the LLC (unlike other employees). A different rule applies if you elect to have your LLC taxed as a corporation. In that situation, as long as you meet the IRS guidelines, you can receive fringe benefits as an owner-employee of the LLC and not have to pay tax on the value of those benefits.

Excerpted from "Form Your Own Limited Liability Company" by Anthony Mancuso
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