LLCs aren’t required to have income or post profits. But if a business owner is claiming tax deductions through an LLC without reporting income, the IRS is likely to conduct an audit. The IRS will only allow you to claim losses on your business for three out of five tax years.
A one-member LLC’s profits/losses are reported on the owner’s tax return. The LLC itself doesn’t pay taxes or file a return.
LLCs can elect C corporation status to receive refunds if quarterly estimated payments exceed the tax liability. LLCs set up as S corporations file a Form 1120S but don’t pay any corporate taxes on the income.
To start an LLC:
- Select a business name
- Appoint a registered agent
- Complete and file formation documents
- Create an operating agreement
- Obtain tax ID numbers
- Set up licenses and permits
- Open a bank account
The average cost is $132. An LLC limits liability and provides tax flexibility. This makes it appealing for small businesses.
To make money with an LLC:
- Define business goals
- Formally register
- Arrange financing/accounting
- Market services/products
- Provide consistent quality
What are 3 disadvantages of an LLC?
- Complexity of taxes and paperwork
- Potential for an IRS audit if improper deductions are claimed without income
- Limited period for claiming losses on the business
Can I keep my LLC if I don’t make money?
Yes, an LLC does not necessarily need to make any income to be considered an LLC. However, you must file a tax return unless it had no income or expenses during the year.
What if I don’t make money with my LLC?
If your net business income was zero or less, you may not need to pay taxes, but the IRS may still require you to file a return.
States charge an initial formation fee for an LLC.