LLCs can be expensive to form and maintain, and they may not offer the liability protection of a corporation. Profits and losses are passed to owners, who pay taxes, and states have specific rules about LLCs. The main cost is the state filing fee, which ranges from $40-$500. Additionally, setting up an LLC may lead to disputes between members over operations or profit distribution. Taxation complexity is another downside, with potential double taxation and self-employment taxes being concerns.
Tax Considerations for LLCs
The IRS treats one-member LLCs as sole proprietorships for tax purposes, meaning the LLC does not pay taxes itself but the owner must report profits or losses. If your net business income was zero or less, you may not need to pay taxes but might still need to file a return.
Establishing and Operating an LLC
The steps to register an LLC include:
- Choose a business name
- Select a registered agent
- File formation documents
- Create an operating agreement
- Get 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 smooth distribution of assets and settlement of obligations. States charge an initial formation fee for an LLC. While LLCs aren’t required to have income or post profits, claiming tax deductions through an LLC without reporting income might attract an IRS audit. The IRS also limits claims of losses on your business to three out of five tax years.