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How to file Taxes for a Limited Liability Company (LLC) with no Income

How to file Taxes for a Limited Liability Company (LLC) with no Income

A limited liability company is a business structure whose owners are legally responsible for its debts only to the extent of the amount of capital they invested. It is a company that has similar features to that of a corporation combined with those of a partnership or sole proprietorship.

LLC Tax Filing

The LLC is either taxed as a sole proprietorship or as a Corporation depending on the number of owners or partners in the LLC.

– One Owner LLC/ Sole proprietorship tax filing status:

An LLC that has only one member is treated by the IRS as a sole proprietorship for tax purposes and automatically ignored by the IRS for federal income tax purposes. It is not regarded as an entity. In this type of LLC, the owner files the income and expenses of the business on his/her personal tax returns.

This means that the LLC itself does not pay taxes and does not have to file a return with the IRS. However, all profits or losses of the LLC must be reported on Schedule C of the Owner’s personal tax returns.

 

– Partnership/ Corporation tax filing status:

This is an LLC that has more than one owner/partner. The IRS taxes LLCs with multiple owners as a corporation/partnership. An LLC with multiple members can choose to be taxed as a corporation in which the LLC is taxed of the total income of the LLC before the sharing of the distributive shares of each member. Then, each LLC member also will be taxed individually on their distributive share and they are liable for income tax on their rightful share of the income.

However, as an S-corporation, also a limited liability company, may prefer not to pay federal taxes corporately but claim the profit and losses on the personal tax returns of the individual partners/owners. In this case, the LLC will be required by the IRS to report the total Income and Loss of the Corporation. Then after receiving the distributive share, each member of the partnership would then receive a form stating their own share of the LLC’s profit or loss which will be filed on the member’s individual tax return. Each partner is taxed like an individual business owner.

 

Do I have to pay taxes on an LLC that made no money?

Depending on the specific situation, an LLC  can have a year without conducting business activities or making income. Then comes the needed question: What do we do about the LLC’s tax? Do we need to file the LLC’s tax return?

The answer to those questions depend entirely on the tax filing status of the LLC.

 

  1. LLC taxed as a C- corporation

This is a tax payment method used by an LLC treated as a Corporation/partnership in which the LLC files tax returns on total income before the distributive share to the owners.

Mostly, if an LLC has two or more members or owners, the IRS will tax it as a partnership. The LLC treated as a partnership is required to file an informational partnership tax return. However, in the case of no business activity nor income, it is then not required to file the informational partnership tax return. The LLC is however advised to file a tax returns if it desires to claim expenses, credit, or to avoid unnecessary “fail-to-file” tax penalties from the IRS (even though “no income” can prove you had no reason to file). All corporations should file a tax return, even if they do not have any income.

 

  1. LLC taxed as an S- corporation

This is a LLC in which all owners /partners decide to be treated as an S- Corporation for tax purposes. Therefore, as a Corporation, the LLC needs to file a federal income tax return even if it has no business activity or income for the year.

In the S-corporation, the LLC does not pay tax itself. It sends all it’s business income information to the IRS but the income and expenses are passed through its owners who file for the taxes under their own personal tax returns. If the owners refuse to file, they would be charged individually with a fail-to-file penalty.  All corporations including S-Corporations need to file a tax return, even if they do not have any income.

 

  1. LLC taxed as a Sole Proprietorship

This is a tax payment method used by an LLC treated as a sole proprietorship (disregarded entity) in which the owner reports the LLC’s income, expenses, and losses on their individual personal tax return.

The filing is done under Schedule C of the owner(s)’ tax return for income and also for losses for most new businesses that encounter years of loss before profits. In the case of no business income or activity for the year, the owner(s) do not need to file Schedule C of the form when filing for their personal tax return.

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