The downside of an LLC includes complexity of taxes and paperwork. Filing tax returns is required unless the LLC had no income or expenses during the year. An LLC doesn’t need to have income to maintain its status, but if it continually reports losses without income, it might invoke IRS scrutiny, potentially leading to an audit. Additionally, the IRS only allows claiming losses on your business for three out of five tax years.
LLCs can elect C corporation status for the possibility of receiving tax refunds if the quarterly estimated payments exceed the tax liability. There are instances where the IRS treats a one-member LLC as a sole proprietorship for tax purposes; thereby the LLC does not pay taxes itself and does not have to file a return but the owner must report profits or losses on their own tax return.
However, disadvantages also include expenses as states charge an initial formation fee for an LLC and complications may arise in terms of member disputes and the potential for dual levels of taxation if not properly structured.
Steps to Start and Manage an LLC
To register an LLC:
- Choose a business name
- Select a registered agent
- File formation documents
- Create an operating agreement
- Get an 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
When winding down an LLC, its simplified structure allows for the smooth distribution of assets and the settling of obligations.