Taxation and Costs
LLC disadvantages include complexity of taxes and paperwork. The IRS treats one-member LLCs as sole proprietorships for tax purposes. This means that the LLC itself does not pay taxes and does not have to file a return with the IRS. However, 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. The IRS will only allow you to claim losses on your business for three out of five tax years.
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 to determine if the LLC is an actual for-profit business. States charge an initial formation fee for an LLC.
Business Operation
Registering and Making Money with an LLC
Steps to register an LLC include:
- Choose a business name
- Select a registered agent
- File formation documents
- Create an operating agreement
- Get EIN
- Set up business licenses and permits
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
Simplified Dissolution
When winding down an LLC, the simplified structure allows smoothly distributing assets and settling obligations.
Can I Keep My LLC If I Don’t Make Money?
The LLC must file a tax return unless it had no income or expenses during the year. An LLC does not necessarily need to make any income to be considered an LLC.
Do LLCs Get Tax Refunds?
LLCs can elect C corporation status to receive refunds if quarterly estimated payments exceed the tax liability.
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. The IRS may still require you to file a return, however.
Personal Asset Protection
As the sole owner of your LLC, you must report all profits or losses of the LLC on Schedule C and submit it with your 1040 tax return.