By default, an LLC is a "pass-through" entity for tax purposes. This means the LLC itself does not pay taxes. Instead, profits and losses "pass through" to owners. Owners then report them on tax returns. An LLC treated as a sole proprietorship files taxes using Schedule C or C-EZ with the individual’s return. The owner pays self-employment taxes based on earnings.
LLC Tax Structures and Forms
An LLC treated as a partnership files Form 1065 to report income and deductions to partners and IRS. The form is filed annually.
LLCs taxed as C-corps file Form 1120 to report income and deductions. They pay taxes on income. Members pay taxes on dividends. The form must be filed whether or not LLC had income. S-corps file Form 1120-S annually regardless of activity since S-corps are pass-through entities. Members report income on personal returns.
Single member LLCs default as disregarded entities. Earnings pass directly to owner without paying corporate taxes first. Shareholders then report income on personal returns, avoiding double taxation.
LLCs with losses can write off investments, deduct expenses, or carry losses forward. Truly worthless investments qualify for write-offs on Form 8949. Operating losses help lower or eliminate tax burden. Most LLC structures let owners claim losses personally. But C corporations cannot pass losses to owners’ returns.
Non-Operation and Filing Obligations
New LLCs may not operate for over a year. Older LLCs may become inactive without dissolving. Inactive LLCs mandated to file returns depending on tax status.
An LLC files taxes based on its structure. Single member LLCs default as sole proprietors. Multiple member LLCs default as partnerships. LLCs taxed as corporations file returns regardless of income.
Whether mandated or not, filing taxes for no income LLCs has benefits. It establishes deduction history. It maintains compliance if claiming tax exempt status. And it keeps LLC in good standing with state. Not filing risks penalties, back taxes or suspension. Some states charge fees regardless of income. California charges $800 to LLCs operating or organized there.