LLC Member Types & Tax Classifications: What You Need to Know
When you form an LLC (Limited Liability Company), one of the first choices you make is who will be a member (owner). That choice affects how your LLC is taxed, the forms you file, and even how you can change your tax status in the future.
At SimpleCorp, we help business owners make these decisions the right way from the start — and avoid costly mistakes later. Here’s what you need to know.
Step 1: Understanding “Members” in an LLC
An LLC member is simply an owner.
Single-member LLC → You’re the only owner.
Multi-member LLC → You have two or more owners.
All members actively involved → Everyone participates in running the business.
Some members passive → Some owners invest money but don’t help run the company.
💡 Tip: The IRS doesn’t care about “active” or “passive” when you first form your LLC — but it does care about how many members you have.
Step 2: How Member Count Affects Tax Classification
By default, the IRS uses member count to decide how your LLC is taxed:
| LLC Type | Default IRS Classification | Tax Forms Filed |
|---|---|---|
| Single-member LLC | Disregarded Entity (taxed like a sole proprietorship) | Schedule C with your personal tax return |
| Multi-member LLC | Partnership | Form 1065 (partnership return) |
| LLC electing corporate tax status | C Corporation | Form 1120 |
| LLC electing S Corporation status | S Corporation | Form 1120-S |
In plain terms:
A single-member LLC is treated like you and the business are one for taxes.
A multi-member LLC is treated like a partnership.
You can choose corporate or S corporation status if it’s better for your situation.
Step 3: Changing Your Tax Classification
Here’s where Form 8832 and Form 2553 come in:
Form 8832 – Entity Classification Election
Use this to tell the IRS you want your LLC taxed as a C Corporation instead of the default.
You can also use it to change from C Corporation back to partnership/sole prop classification.
Form 2553 – Election by a Small Business Corporation
Use this to have your LLC taxed as an S Corporation.
You must meet S Corp rules (100 or fewer shareholders, all U.S. citizens or residents, one class of stock, etc.).
Example:
You start as a single-member LLC (default: disregarded entity).
Your profits grow, and you want to save on self-employment taxes.
You file Form 2553 to be taxed as an S Corporation starting next year.
Step 4: Why You Might Change Your Status
Lower taxes: S Corps can reduce self-employment tax if structured correctly.
Business growth: Investors may prefer corporate tax status.
Flexibility: Certain industries or contracts may require a specific tax classification.
💡 Pro Tip from SimpleCorp: Always talk to a CPA before making a change — it can save you thousands in taxes or prevent you from making a costly mistake.
Step 5: FAQs
Q: Can I start as a single-member LLC and add members later?
A: Yes — just update your operating agreement and notify the IRS if your tax classification changes.
Q: Do I need to file Form 8832 and 2553 together?
A: No. Form 8832 is for C Corp election; Form 2553 is for S Corp election. Sometimes you file both if you need to go from LLC → C Corp → S Corp in one step.
Q: Will changing my tax classification affect my liability protection?
A: No — your LLC liability protection comes from state law, not your IRS tax status.
Bottom Line
Choosing the right LLC member setup isn’t just about ownership — it sets the stage for how your business will be taxed and what IRS forms you’ll file. The good news? You can change your classification later using the right forms.
At SimpleCorp, we guide you from LLC setup to EIN to the right tax classification for your goals — and we handle the paperwork for you.
📌 Next Step: Start your LLC with SimpleCorp →