What Can I Do with an LLC? Disadvantages of an LLC

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Taxation and Complexity

  • LLC disadvantages include complexity of taxes and paperwork. However, the liability protection and tax flexibility often benefit small businesses.
  • 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.
  • LLCs aren’t required to have income or post profits, but if a business owner is claiming tax deductions through an LLC without reporting income, the IRS is likely to conduct an audit to determine if the LLC is an actual for-profit business.
  • The IRS will only allow you to claim losses on your business for three out of five tax years.

Formation and Maintenance Costs

  • States charge an initial formation fee for an LLC.

Steps to Register an LLC

  1. Choose a business name
  2. Select registered agent
  3. File formation documents
  4. Create operating agreement
  5. Get EIN
  6. Set up business license and permits

Steps to Start Making Money with an LLC

  1. Define business goals and target market
  2. Formally register your LLC
  3. Arrange financing and accounting
  4. Market services and products
  5. Provide consistent quality and value

Winding Down

  • When winding down an LLC, simplified structure allows smoothly distributing assets and settling obligations.

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