Contractor License Practice Exam

An LLC can choose to be taxed as which of the following?

1. Only as a corporation

2. Only as a partnership

3. Sole proprietorship, partnership, or corporation

4. Only as a sole proprietorship

The correct answer is: Sole proprietorship, partnership, or corporation

The correct choice reflects the flexibility that Limited Liability Companies (LLCs) have concerning their tax treatment. An LLC can elect to be taxed as a sole proprietorship, a partnership, or a corporation, depending on how many members it has and the preferences of those members. If an LLC has just one owner, it is typically taxed as a sole proprietorship by default, which means that the income and expenses of the business are reported on the owner's personal tax return. When there are multiple owners, the LLC is treated as a partnership unless it opts to be taxed as a corporation. Moreover, LLCs can also choose to be taxed as a corporation, either as a C corporation or an S corporation, by filing the appropriate forms with the IRS. This flexibility allows business owners to select the tax treatment that best suits their financial situation and business goals, making it a versatile option for structuring a business. The other options are limited in their scope, specifying only one type of taxation, which does not account for the various choices an LLC has in electing its tax status.