Q: What does it mean for a business entity to “Check the Box”?
A: The phrase “Check the Box” refers to eligibility of certain business entities to elect how they will be classified, and therefore taxed, for federal income tax purposes.
Business entities generally fall into one of the following four categories for federal income tax purposes: disregarded entities, partnerships, S corporations, and C corporations. The Internal Revenue Code imposes a different tax regime on each category of business entity, and, therefore, it’s important for business owners to understand how their business will be classified if they make no election and whether their business is eligible to elect a different classification by “Checking the Box” on IRS forms as described below.
The default classification of a business entity that does not Check the Box depends on its structure under state law and the number of owners it has.
Business entities established pursuant to business corporation statutes, including the New Hampshire Business Corporations Act (RSA Chapter 293-A), are classified, by default, as C corporations.
The classification of unincorporated business entities, such as limited liability companies (“LLCs”) established pursuant to the New Hampshire Revised Limited Liability Company Act (RSA Chapter 304-C), are classified based on the number of owners they have. For example, an LLC with one owner is classified, by default, as a disregarded entity, and an LLC with more than one owner is classified as a partnership.
Business entities that are classified as disregarded entities or partnerships may elect to be classified as C corporations by Checking the (appropriate) Box on IRS Form 8832, “Entity Classification Election”, and timely filing it with the IRS. In addition, certain qualifying business entities, regardless of their default classification, may elect to be classified as S corporations by Checking the Box on IRS Form 2553, “Election by a Small Business Corporation”, and timely filing with the IRS. In general, a business entity qualifies to elect classification as an S corporation so long as it is a domestic business entity with no more than 100 qualifying shareholders and a single class of stock, among other requirements.
While the process for selecting the classification of your business entity is as simple as Checking the Box, business owners should be aware that the tax implications of Checking the Box may be significant and the decision to do so should be made with the help of a knowledgeable tax advisor.
Know the Law is a bi-weekly column sponsored by McLane Middleton. Questions and ideas for future columns should be emailed to knowthelaw@mclane.com. Know the Law provides general legal information, not legal advice. We recommend that you consult a lawyer for guidance specific to your particular situation.