LLCs can be expensive to form and maintain, and they may not offer the complete liability protection of a corporation. Also, differing ideas among members may lead to disputes about operations or profit distribution. LLCs choose their tax status, which might lead to complexity and the potential for double taxation, as profits can be taxed at both the corporate and personal levels. Additionally, members may be responsible for self-employment tax.
Taxes and Tax Returns
An LLC must file a tax return unless it had no income or expenses during the year. It does not need to earn income to retain its status. LLC members report profits or losses on their personal tax returns. However, if an LLC elects C corporation status, it may receive refunds if quarterly estimated payments exceed the tax liability. The IRS treats one-member LLCs as sole proprietorships, and losses can only be claimed for three out of five tax years.
Steps to Register an LLC
- Choose a business name
- Select registered agent
- File formation documents
- Create operating agreement
- Get EIN
- Set up business license and permits
Making Money and Winding Down an LLC
To generate income:
- 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 smooth distribution of assets and the settling of obligations.
LLCs are not required to generate income or profits, but claiming tax deductions through an LLC without reporting income may prompt an IRS audit to verify if it’s a for-profit business. States charge an initial fee for LLC formation.