Business Entities, Classification and Elections

How a business is classified for federal tax purposes, which elections change that result and when they must be filed, the required tax year and return due dates, and the basic information-return duties. The SEE opens Part 2 with these rules because every later question depends on knowing what kind of taxpayer the business is.

Business Entities and Considerations5 min read6 sections

Must-know for the exam

A domestic LLC defaults to a partnership with two or more members and a disregarded entity with one; Form 8832 elects corporate status (Treas. Reg. 301.7701-3(b)(1)).
A Form 8832 election can be effective up to 75 days before filing and 12 months after; another change generally waits 60 months (Treas. Reg. 301.7701-3(c)(1)).
Form 2553 is due within 2 months and 15 days after the start of the election year, or any time in the prior year (IRC 1362(b)(1)).
S corporations need 100 or fewer eligible shareholders and one class of stock; voting differences alone are not a second class (IRC 1361(b); Treas. Reg. 1.1361-1(l)).
Spouses filing jointly who alone run an unincorporated business may elect qualified joint venture status and each file Schedule C (IRC 761(f); Pub. 334 (2025)).
2025 Forms 1065 and 1120-S were due March 16, 2026; Form 1120 April 15, 2026; Form 7004 gives 6 more months (IRC 6072; Form 1065 instructions (2025)).
Late Form 1065 or 1120-S penalty for returns due in 2026: $255 per partner or shareholder per month, up to 12 months (IRC 6698, 6699; Rev. Proc. 2024-40 sec. 3.56-3.57).
The 2025 section 448(c) gross receipts test is $31,000,000 for the cash method, inventory and 163(j) exemptions (Rev. Proc. 2024-40 sec. 3.31).
An activity is presumed for profit with profit in 3 of 5 years, or 2 of 7 for horses (IRC 183(d)).
Form 1099-NEC is due to payees and the IRS by January 31; e-filing is required at 10 or more information returns in aggregate (IRC 6071(c); Treas. Reg. 301.6011-2).

On this page · 6 sections

Traps that cost marks

Treating every LLC as a disregarded entity.
Assuming an election can reach back to the start of any tax year.
Using the individual return due date for the S election.
Treating voting and nonvoting shares as two classes of stock.
Reporting a jointly owned business on one spouse's Schedule C.
Assuming every business needs an EIN.
Assuming a partnership can freely choose a fiscal year.
Using the horse activity test for ordinary activities.

Why it matters on the exam

Part 2 Domain 1 carries 30 of the 85 scored questions and starts with classification. The SEE asks what an LLC is by default, how and when an election is made, which tax year an entity must use, and when its return is due. Many questions turn on a date, so learn the 2026 filing calendar for 2025 returns.

C corporations, including personal service corporations, pay a flat 21% rate (IRC 11(b)).

Default classification and elections

Entity	Default	Election available
Single-member domestic LLC	Disregarded entity (Schedule C, E or F)	Corporation on Form 8832, then S on Form 2553
Multi-member domestic LLC	Partnership (Form 1065)	Corporation on Form 8832, then S on Form 2553
State-law corporation	C corporation (Form 1120)	S corporation on Form 2553
Spouses' unincorporated business	Partnership	Qualified joint venture: two Schedules C and SE
Homeowners or condo association	Corporation (Form 1120)

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Business Entities and Considerations