An LLC does not necessarily need to make income to be considered an LLC. LLC disadvantages include complexity of taxes and paperwork.
LLCs can elect C corporation status to receive refunds if quarterly estimated payments exceed the tax liability. They also have the option to be treated as S corporations or sole proprietorships for tax-reporting purposes.
The IRS treats one-member LLCs as sole proprietorships for tax purposes, which means they do not file separate tax returns, instead including profits or losses on the owner’s personal return.
If your net business income was zero or less, you may not need to pay taxes, although a return may still be required.
The IRS may audit businesses claiming tax deductions without reporting income and only allows the claiming of losses for three out of five tax years.
Registering an LLC
Steps to register an LLC include:
- Choose a business name
- Select registered agent
- File formation documents
- Create an operating agreement
- Get EIN
- Set up business license and permits
Operating an LLC
To start making money with an LLC:
- Define business goals and target market
- Formally register your LLC
- Arrange financing and accounting
- Market services and products
- Provide consistent quality and value
When winding down an LLC, its structure allows for the smooth distribution of assets and the settling of obligations.
Costs Related to LLCs
States charge an initial formation fee for an LLC and have various rules about their maintenance.
While LLCs aren’t required to have income or post profits, certain patterns, such as claiming deductions without income, may trigger an IRS audit.