The entity classification regulation under IRC 7701 (”the check-the box regulation”) allows unincorporated business entities to choose their classification for federal tax purpose under an elective regime.

Eligible business entities

Certain business entities are by definition classified as corporation under Treas. Reg. § 301.7701-2(b). They are often referred as to as “per se” corporations and not eligible for election. The “per se” corporations for federal tax purposes include entities incorporated under federal or state law, associations, joint stock companies, insurance companies, banks, state-owned entities, publicly traded partnerships and certain foreign entities. A business entity that is not expressly classified as a corporation under the regulations is referred to as an “eligible entity” and is permitted to elect its classification for federal tax purposes.

Default Classification for Domestic entity

A domestic entity is one created or organized in theUnited Statesor underU.S.Under default rules, unless the entity elects otherwise, a domestic eligible entity is classified as a partnership if it has at least two members; if it has a single owner, it is disregarded. Accordingly, a domestic general partnership, a limited partnership or a limited liability company (LLC) is classified as a partnership for federal tax purpose.

Default Classifications for Foreign entity

A “foreign eligible entity” is a business entity that is not required to be classified as a corporation under Proposed Regulation 301.7701-2(b)(8). The regulations provide default classification rules for eligible non-U.S. entities that do not make check-the-box elections. The key for the default classification for foreign entities is whether or not the members have limited liability. Whether the member has limited or unlimited liability is determined by the law of the country where the entity has been formed and the charter or by-laws of the entity itself. The rule for a foreign eligible entity is that it will default to be treated as:

• a corporation if all of its owners have limited liability,
• a partnership if it has two or more owners and at least one owner does not have limited liability, and
• a disregarded entity if it has a single owner that does not have limited liability.

Classification Election

An eligible entity with at least two members can elect to be classified as a partnership or as a corporation for federal tax purposes. An eligible entity with a single owner can elect to be classified as a corporation or can be disregarded as an entity separate from its owner under regulations section 301.7701-3(a). If the entity is disregarded, it is treated as a sole proprietorship if it is owned by an individual; if it is owned by a corporation, it is treated as a branch or division.

An election is necessary only when an eligible entity choose to be classified initially other than the default rule or when the entity chooses to change its classification. An entity retains its default classification without regard to changes in the member’s liability until the entity makes an election by filing form 8832. As permitted under Treasury reg. section 301.7701-3(c), the business entity filed an otherwise valid Form 8832 electing to be treated for federal tax purposes as a partnership based on the reasonable assumption it had two or more owners as of the effective date of the election, or elected to be treated as a disregarded entity based on the reasonable assumption it had a single owner as of the effective date of the election. The classification election can be made either at formation of the entity or at a subsequent time. The latter case is referred to as an elective change in classification.
The election is effective on the date specified on Form 8832, or if no date is specified, on the filing date. If, however, an election can specify an effective date as early as 75 days prior to the filing date or 12 months after. A change in entity classification cannot be made within 60 month from the effective date of the election. Under certain circumstances, an entity may be able to make a retroactive election effective up to 3 years and 75 days before form 8832 is filed. The late relief is available to entities that intended to elect a certain classification, but have not file the election form.