The change in the law provides several different options to entities such as an LLC. It will allow a business operated as an LLC to enjoy all of the beneficial characteristics of a corporation but still be taxed as partnership or, in the alternative, it provides for an LLC to elect corporation tax status and then make the S corporation election.

In a nutshell, partnership taxation is a form of pass through taxation where the the income and deductions "flow through" the entity and are reported and paid by the individual partners. Most LLCs and S corporations are taxed this way. On the other hand, if an entity is considered a corporation, it will have to pay income taxes on its net profits and then when those proceeds are paid to the shareholders in the form of dividends, they will have to pay tax again at their personal level. This is called the "double tax" of corporations.

Most small businesses can avoid this double taxation either by forming an LLC or electing S corporation status. LLCs by default receive partnership taxation. This means if the owners do not make an election by filing Form 8832 to be taxed as something different than a partnership the LLC and its members will automatically be subject to partnership taxation principles. A corporation which makes the S election is also subject to the basic partnership taxation principles with a few exceptions. Both LLCs and S corporations are considered pass through entities for tax purposes and are subject, with a few exceptions, to the partnership form of taxation.

According to the accountants and tax advisors I work, a business owner can reduce (not eliminate) the FICA or 15.3% self employment tax by forming a corporation and making the S election. However, this reduction in FICA taxes is not available in most cases to the members of an LLC. So a business person can form an LLC and then make the election to be taxed as a corporation by filing IRS Form 8832 and then make the S election by filing IRS Form 2553. By doing this, the LLC can operate with the less formal structure and rules associated with corporations but also obtain reduced FICA tax treatment for the members.

Setting up an LLC which elects tax treatment similar to the S corporation, may be an attractive option to discuss with your accountant or tax advisor. In addition to being able to operate under the less formal requirements of an LLC, you get limited liability protection, basic partnership taxation, with a few exceptions, and the chance to reduce FICA taxes for the members of the LLC.