LLCs have several drawbacks, including complexity of taxes and paperwork, potential for member disputes, and the costs associated with formation and maintenance.
Taxes and Liability
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.
LLCs aren’t required to have income or post profits. If a business owner is claiming tax deductions through an LLC without reporting income, the IRS may conduct an audit. The IRS will only allow you to claim losses on your business for three out of five tax years.
The IRS treats one-member LLCs as sole proprietorships for tax purposes, meaning the LLC itself does not pay taxes and does not have to file a return with the IRS. However, as the sole owner, you must report all profits or losses 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, but the IRS may still require you to file a return.
Formation and Maintenance Costs
States charge an initial formation fee for an LLC.
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
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, the simplified structure allows for smoothly distributing assets and settling obligations.