Entity Classification

Form 8832: How to Determine the Entity Classification for your Business

Knowing how to classify your business can be tricky, as there are many options. Expert business owners both foreign and domestic refer to Form 8832 to decide how the IRS classifies their entity within the lens of taxation.

Form 8832 will lay out the parameters for how your business should be classified. Your choices are:

• C Corp

• Disregarded Entity

• Partnership

Failure to determine your classification through this form will force the IRS to to tax your and your business based on the default classification of your entity. This could mean you’re paying more than you need to in federal taxes. Filing Form 8832 and identifying your unique business’ proper classification can save you a lot of money in the long run and help protect your individual finances and assets. 

The default classification for LLCs with only one member, for example, is as a disregarded entity. LLCs with more than one member default to a partnership. LLC members in either situation are bound to disclose and pay the business’ taxes within their personal tax returns. Because of this, some LLCs opt for the C Corporation classification because this prevents business profits from going through your personal taxes. S Corporations do not relate to Form 8832, utilizing IRS Form 2553 instead for a similar purpose. 

It is important to note that this form is not required. If you are satisfied with your default classification, you do not need to submit this form. Entities such as domestic and foregin partnerships and domestic and foreign LLCs are eligible to file Form 8832, and domestic corporations are usually prohibited from filing the form. Form 8832, since it is not required by law, does not have a set deadline. Instead, you will provide a date for the change to initiate. This date must be within the timeframe of Up to 75 days before filing, and up to one year after you filing.

If you need assistance with setting your date, or with the general filing of Form 8832, consult a professional service like Dimov Tax & CPA Services. Their team of superior CPAs can help you strategize and set the most effective date for your classification to initiate, or guide you through re-filing the form should you wish to change your entity’s classification. Generally, you are only able to alter your classification every 5 years, but there are some exceptions. A tax professional like George Dimov or one of his associates can walk you through it effectively and easily!