Taxes and Complexity
LLC disadvantages include complexity of taxes and paperwork. However, the liability protection and tax flexibility often benefit small businesses.
Tax Returns and Refunds
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. 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 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. 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.
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.
The IRS will only allow you to claim losses on your business for three out of five tax years.
Formation and Operation of an LLC
Registering an LLC
Steps to register an LLC include:
- Choose a business name
- Select registered agent
- File formation documents
- Create operating agreement
- Get EIN
- Set up business licenses and permits
Making Money With an LLC
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
States charge an initial formation fee for an LLC.
Winding Down an LLC
When winding down an LLC, the simplified structure allows smoothly distributing assets and settling obligations.