LLC disadvantages include complexity of taxes, required paperwork, and the potential for disputes among members. While the liability protection and tax flexibility often benefit small businesses, LLCs can be expensive to form and maintain. They may not offer the liability protection of a corporation. Profits and losses pass through to the owners, who pay taxes on their personal tax returns.
Maintaining an LLC
The LLC must file a tax return unless it had no income or expenses during the year. It does not need to make any income to be considered an LLC. LLCs can elect C corporation status to receive refunds if quarterly estimated payments exceed the tax liability. However, LLCs set up as S corporations file a Form 1120S but don’t pay any corporate taxes on the income.
The IRS treats one-member LLCs as sole proprietorships for tax purposes, meaning the LLC does not pay taxes and does not have to file a return. Profits or losses of the LLC are reported on Schedule C by the owner.
Registration and Operation
Steps to Register an LLC:
- Choose a business name
- Select a registered agent
- File formation documents
- Create an operating agreement
- Get EIN
- Set up business license 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
Dissolving an LLC
When winding down an LLC, its simplified structure allows for smoothly distributing assets and settling obligations.
Tax Considerations
States charge an initial formation fee for an LLC. The IRS may audit LLCs without reported income but claiming tax deductions to ensure the LLC is an actual for-profit business. The IRS will only allow you to claim losses on your business for three out of five tax years. If your net business income was zero or less, you may not need to pay taxes, though a return might still be required.