Formation and Considerations
Limited liability companies offer liability protection and flexibility in taxation, making them attractive options for individuals looking to pursue entrepreneurial endeavors or protect assets. However, costs of setting up and maintaining an LLC require consideration, as does paperwork and compliance. Sole proprietorships and partnerships can legally conduct business unofficially without registering as corporate entities, but they do not separate personal liability from business debts. Alternatives exist to limit personal liability without establishing business entities straight away, like verbal partnership agreements and trade names.
Tax Obligations and Loss Claims
What happens if my LLC doesn’t make money?
A business legally must pay taxes if it has employees. The IRS will only allow you to claim losses on your business for three out of five tax years. If you don’t show that your business is starting to make a profit, then the IRS can prohibit you from claiming your business losses on your taxes.
LLCs can elect C corporation status and make estimated payments higher than tax liability to get a refund. Non-capital losses can offset income over three back years and seven forward years. Profits and losses of an LLC don’t flow to owners’ personal returns if taxed as a C corporation.
An LLC does not need income to be considered an LLC since it is a pass-through entity. Owners only report income on personal returns because the business itself does not pay taxes.
Financing and Starting a Business
There are a few ways to start a business with no money: start a service-based business with low startup costs, find a business partner to invest, or seek grants/loans. LLCs can raise money to increase cash flow by securing LLC financing instead of seeking venture capital. You can quickly check Illinois business name availability online before forming an LLC. There are several ways of funding LLCs that business owners use frequently: Apply for business funding, take loans, and seek investors.
The Illinois Secretary of State charges $150 to file the Articles of Organization. Wait 10-15 business days for approval of your Illinois LLC.
Personal Liability and Business Outcomes
You can be personally liable if your LLC incurs debts due to irresponsible financial management. However, even if a business doesn’t make any money, if it has employees, it’s legally obligated to pay Social Security, Medicare, and federal unemployment taxes. Your business also might receive a tax refund if it overpays on payroll or sales taxes.
You can sue an LLC with no money. After the Tax Cuts and Jobs Act passed in 2018, your “net operating loss” carryforward is now limited to 80% of your taxable income.
Whether your business stopped making money or never made it in the first place, likely reasons include no product-market fit, lack of capital, and poor marketing. It’s possible to start a business with little or no money by exploring financing options and ways to bootstrap. An easy way is to start by selling your services.