Naturally, people start businesses to make money. A limited liability company (LLC) is a business entity that gives your business a legal form and separates it from you as a physical person. You can get to know how to start an LLC company at the legal portal llc.services – there you can find detailed answers to all questions regarding the founding of an LLC. With multiple LLC formation services at hand, opening an LLC is a matter of quick and simple moves. Similar to other business structures, LLC companies are expected to gain profit to improve their owners’ welfare. However, no one says that earning money is as easy as starting a business. While LLC incorporation is mostly about matching formalities, making your company grow and generate profit is a bit of a different affair. So, technically, you can diligently complete your LLC creation, yet, it doesn’t mean your company has to generate income. In the meantime, though, like any other business entity, an LLC should meet certain tax requirements, irrespective of the company profitability. It’s an issue you can’t neglect, and we’ll tackle it below.
Reasons for LLC Formation Making No Income
Having a legally formed business doesn’t necessarily mean it will raise money. It might be something you expect or even aim at, or it might be something that causes losses and you haven’t foreseen it. Let’s take a look at situations when an LLC company doesn’t gain any income:
- Startup Project: When you open an LLC company to give your business idea a legal form seeking to start a business on the right foot, it’s quite normal that you might have zero profit for some time until your company gathers pace.
- Business “On-pause”: For some reason, be it personal or business-related reasons, you might want to put your venture on hold, which means the absence of business activity while still keeping your LLC active.
- Waiting for Technical Dissolution: Unlike corporations that exist perpetually, LLC companies can have a certain “lease of life” when founded for some specific purposes and the dissolution date is written down in the Articles of Association. Yet, the LLC dissolution is not a matter of a single day, so the company can stay inactive and have no profit or expenses for some time while waiting for formal dissolution.
- Losses Exceeding Income: Both company losses and incomes are to be reported to the IRS. Yet, losses are deductibles subtracted from taxable incomes. Hence, if losses exceed incomes, your company will show no profit.
Whatever the reason for your LLC making no profit, it doesn’t relieve you from filing business taxes, no matter how counterintuitive it seems. So, even if your LLC has no income and expenses for the tax year, in most cases, you still need to submit business tax returns depending on the tax classification you’ve chosen for your LLC. Besides, filing deductible expenses without reporting income can lead to an audit from tax authorities and result in penalties or fines.
LLC Formation and Tax Filing Requirements for Different LLC Tax Classifications
Taxation is an essential part of any business. Business activity automatically requires reporting your revenues, compensations, credits, deductions, losses, and expenses to tax authorities. Even if you are a free-lancer, once you start earning money, you are considered a sole proprietorship in the eyes of the IRS. When it comes to taxation, LLC companies offer by far the best flexibility, hence the popularity of this business structure among smaller business owners. Unlike other business entities, LLCs can choose the taxation scheme that will be most appropriate for their business situation upon LLC incorporation. At the same time, though, when having no activity and no profit accordingly, many LLCs still have to submit tax returns that largely depend on the chosen tax classification. By and large, formed at the state level, LLC companies with no income can skip filing federal tax returns while still kept liable for state tax returns. To better understand the whole situation, let’s take a look at the rules for different tax classifications.
Tax Rules for LLCs Treated as Sole Proprietorships
This taxation method is applied to single-member LLCs only that are treated as disregarded entities or sole proprietorships in the eyes of the IRS. As such, an LLC company files its business taxes on the personal tax returns of its owner and is taxed under valid individual tax rates. Any LLC of this type should report its revenues under Schedule C in case the annual income is over $400. Lower amounts save you the need to fill in the tax form. Free from federal tax returns, LLCs of this type don’t have to file federal taxes in the period of no activity as well.
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Tax Rules for LLC Formations Treated as Partnerships
LLC companies with two or more members are considered partnerships for tax purposes and report to the IRS on Form 1065 to inform their earnings and deductibles while the company income still passes to the owners’ personal tax returns. When not active, partnerships are exempt from business tax returns only if they have no credits and costs to file. Otherwise, the tax return is still needed.
Tax Rules for LLCs Elected as Corporations
A corporation status for tax purposes is mostly a privilege of rapidly growing LLCs and bigger companies with higher profit levels. LLC businesses taxed as corporations can benefit from optimized self-employment taxes and corporate tax rates. Yet, switching to an S-Corp or C-Corp status shouldn’t be a spontaneous decision. It’s advisable weighing all pros and cons beforehand to make sure the move is worth the gain. Meanwhile, LLC companies taxed as corporations are obliged to submit their tax returns to the IRS irrespective of their annual activity and income level. Thus C-Corps file Form 1120, and S-Corps file Form 1120-S every year.
Overall, running an LLC business at loss or with no income doesn’t allow avoiding annual tax returns. One way or another, if you’ve had any transactions during the year, you need to report to the IRS, even if credits and losses have “eaten up” all your earnings. The same is true for situations when your LLC company has no income while still having deductible expenses, in which case you can compensate deductibles via net operating loss deduction.
LLC Services to Handle Your Business Taxes
Business taxation is a flimsy ground to step on. Yet, since you can’t skip taxes, it’s better to find a way to handle them in the most convenient and beneficial manner. Taxes are an especially scary thing for beginner entrepreneurs and startuppers who make their first steps in the business field. Many first-time businessmen contact LLC formation services to get help in the business foundation and many of those companies provide not only online LLC formation but also a wide range of other related professional services including financial services and tax consultations. Thus, for example, such incorporation services as LegalZoom and Rocket Lawyer can handle business taxes for you, saving you peace of mind matching the deadlines, filing appropriate forms, and properly managing your company income and expenses.
Author’s Bio
Dmitriy Kondratiev, chief Editor of LLC.services, associate in Axon Partners.
Experienced lawyer (Intellectual Property, Patenting, Contract law, Labor Law, International Private Law).
Worked with IT-companies Webxloo (Delaware), Autoxloo (Florida), SCC (Delaware)
