11.2 State Law vs. Tax Classification
Key Takeaways
State law: formation and liability. Federal law: taxation.
Check-the-Box (1997): eligible entities elect classification via Form 8832.
Default: 1 owner = disregarded; 2+ owners = partnership.
Per Se Corporations: cannot elect (UK PLC, French SA, German AG).
Domestic Inc./Corp = corporation for tax (can elect S-status, not partnership).
Kintner Regulations replaced by Check-the-Box.
Classification choice now carries permanent OBBBA-era stakes: 21% C-corp + §1202 vs. §199A QBI pass-through.
Why This Matters for the Exam
An LLC formed under state law has no inherent federal tax status. Know the defaults and per se corporations. Under post-OBBBA law (Tax Year 2025), the classification decision is permanent in stakes: a corporate election locks in the 21% flat rate and §1202 QSBS access, while a pass-through default preserves the permanent §199A QBI deduction.
The Distinction
| Governs | Authority |
|---|---|
| Formation and liability | State law |
| Taxation | Federal law (IRS) |
Check-the-Box (Treas. Reg. 301.7701-3)
| Effective | 1997 | | Form | 8832 (Entity Classification Election) | | Purpose | Override default classification |
Default Classifications
| Owners | Default Classification |
|---|---|
| 1 owner | Disregarded entity |
| 2+ owners | Partnership |
Per Se Corporations (Cannot Elect)
| Domestic | Foreign |
|---|---|
| Inc., Corp (state charter) | UK PLC |
| French SA | |
| German AG | |
| Mexican SA |
Form 8832 Use
| Action | Form |
|---|---|
| LLC → Corporation | Form 8832 |
| LLC → Disregarded | Form 8832 |
| C-Corp → S-Corp | Form 2553 (not 8832) |
Real-World Scenario
Scenario: Question about UK PLC changing classification.
- Per Se: UK PLC is per se corporation.
- Result: Cannot check the box — always taxed as corporation (subject to 21% flat rate, made permanent by OBBBA).
On the Exam
Question types to practice on classification:
- Default Questions: "2-member LLC, no election — classification?"
- Per Se Questions: "Can UK PLC elect partnership?"
- Form Questions: "Which form for classification election?"
The key is to remember: 1 owner = disregarded. 2+ = partnership. Form 8832 to elect. Per se corps (PLC, SA, AG) cannot elect.
UK PLC—can it elect partnership status?
Yes, via Form 8832
No, per se corporation
Yes, if US owners
No, only S-Corp
2-member LLC, no election. Default classification?
Disregarded
C-Corporation
Partnership
S-Corporation
Which form to elect corporate status for LLC?
Form 2553
Form 8832
Form 1120
Form 1065
Sections you finish are checked off in the contents.