How to File Taxes for an LLC with No Income

Once you form an LLC, filing tax returns becomes an obligation. Whether the company makes a profit or not, your business must go through the important tax paperwork. 

Filing your tax return regularly as required can be beneficial to your business. However, the opposite comes with a lot of consequences.

The processes your business will take in filing a tax return when it has no income within a time frame is dependent on the tax classification status it has with the Internal Revenue Service.  

While some LLCs are taxed as sole proprietorships or partnerships, others are taxed as corporations with a separate legal identity. You should understand how to file taxes for your LLC even without income. Now, read on to explore.

What is an LLC?

An LLC is a separate legal entity consisting of one or more owners or members. With an LLC separate entity, members are protected from the debts and liability that the business incurs. Thus, members are not liable to offset business debts with their savings.

LLCs are considered a hybrid business structure because they enjoy the benefits associated with a corporation and sole proprietorship or partnership. Tax filings for LLCs sometimes depend on the number of members the company has and how the business wishes to be taxed.

While some LLCs are taxed as a sole proprietorship, others are taxed as a partnership while some are also taxed as Corporations. All of these tax structures have some differences that will be explained in the later part of the write-up.

Can I have an LLC with no Income but expenses?

Yes, it is possible to have an LLC with no income but expenses. It is common among business owners in the US to file taxes for their LLC without income. This is because, in the early years of many businesses, income is barely generated. More attention is focused on ensuring smooth operations and investment before revenue is generated in the following years. So most times startups are likely to face more losses than revenue that could warrant filing taxes with no income.

Do I need To File Taxes for my LLC with no Income?

Yes, it is necessary to file taxes for an LLC with no income. This is so because the IRS treats LLCs as pass-through entities and so LLCs don’t pay income tax instead the profit and losses of the business are passed to the owner's or member's tax returns.

Tax Elections for LLC

For a single-member LLC, the IRS automatically disregards it for federal income tax. This means the LLC isn't recognized as a separate entity for tax payment and with that, the income and losses of the business are reported on the member tax return.

If the LLC has two or more members, they are treated as a partnership by the IRS. The LLC is then expected to file an informational partnership return and each member also reports the LLC income and losses on their personal tax return. 

An LLC either at its formation stage or later can decide to change this classification and be taxed as a corporation. To achieve this the LLC has to file form 8832 with the IRS. With that, we can say an LLC has undergone tax elections.

Tax Elections are processes and procedures taken by businesses to make changes on how they are taxed following the set federal law. It is usually done when a business has no income within a given period. A business can thus opt-in or elect to be taxed as a corporation where the company losses and income are reported on the business tax return or elect to be taxed as a pass-through entity where income and losses of the business are reported on individual member tax return. 

How to File Taxes for LLC with No Income

How an LLC will file taxes even if there is no income depends on how the IRS classifies them based on ownership. 

LLC is treated as a Sole Proprietorship (Single-member LLC)

LLC with a single owner is treated as a sole proprietorship by the IRS. When an LLC is considered a sole proprietorship by the IRS, they are expected to file their taxes using the 1040 Schedule C form. The member will thus report the profit and losses of the LLC on its personal tax return. 

LLC treated as a Partnership 

If an LLC has two or more members, it’ll be taxed as a partnership by the IRS. As such the LLC files the form 1065 called the return of Partnership income. This form serves as an informational return that reports the LLC losses, credits, deductions, expenses, and income.

The profit and losses of the business are thus passed through to be reported on each member's tax return. It is important to note that every member receives his or her Schedule K-1(form 1065) which is used to report the LL partnership income, expenses, and deductions.

LLC treated as a Corporation 

Whether you elect your LLC tax return to be S corps or C corps, your tax filing procedure would be quite different from others discussed above. With the C corps, you are expected to file form 1120 every year even if your business had no activity or income.

C corps status for LLC are not considered as a pass-through entity but rather a separate entity which makes it liable to be taxed as a corporate body. Form 1120 (US Corporation Income Tax Return) is used by the LLC to report its business credits, losses, deductions, etc. which are then passed to the shareholders level for reporting.

S-Corp isn't considered a separate entity. Therefore the company's losses, deductions, and profits can be passed through to be taxed on individual shareholder tax returns. It must therefore file the form 1120-S every year even without having an income.

Benefit of Filing Taxes for Your LLC

Filing taxes for a startup LLC in its first year might not be an interesting thing to do. However, doing it could bring some benefits to your business. Whether your LLC makes an income or not, you would want to ensure that your tax filings are always up to date. 

1. Filing your taxes on time can help you avoid interest and other penalties that are attached to late payments. These interests sometimes when added up could eventually make it more difficult to file your taxes. Moreover keeping up to date with your tax returns shows you and your business are responsible and credible. It shows you are in compliance and this alone could help you build more trust from the public, customers, lenders, suppliers, and so on.
2. Filing your taxes regularly and on time could make you eligible for some tax deductions associated with LLCs. Even when your company experienced a loss in the previous tax year, ensuring that the company file for tax can help you reduce your tax liability in the coming years and help keep more funds within your LLC.
3. Maintaining your tax filings could also help your company remain in good standing with the federal and state governments. You will therefore be eligible for legal protection, thus your company cannot be dissolved without your consent.

Consequences of not Filing Taxes for LLC with no Income

As there are benefits associated with filing your taxes, there are also consequences of not filing your taxes.

1. If you have an accumulated tax that hasn’t been filed, the IRS can charge you for not filing. This can result in a huge financial burden on your business especially if you are just starting. If on the other hand, you also pay your tax lately, interest could add up on it making it more difficult for you to pay up and be right on track. Interest charges start adding up the day after you are supposed to file your tax and this can be up to 5 percent per month.
2. Apart from that you might lose the eligibility to claim deductions and credits from your previous tax years. Most deductions and credits are time-bound and should only be claimed within the tax year they were incurred. Failure to file for tax in that year could make you lose the right to claim the deductions in the following years.
3. Persistent inability to file your taxes could somewhat be disastrous to your business in general. For example, your business could lose the respect of being a separate entity, meaning that any debt incurred from the business could be offset by your personal assets. Moreover, the company's reputation begins to be hindered. Many individual who are willing to do a good deal with your company begins to withdraw and all of that. Finances that could be obtained from lenders become difficult to acquire as there is no more trust.
4. The ability of the company to obtain resources that would lead to growth and expansion is also affected. The legal protection of your company begins to decline and the public recognition fades away with time.

Looking at all these consequences, business owners must regularly file their taxes. Even in the year when no income is made, the paperwork should still be done. Reporting to the IRS whether an income is made or not doesn’t only help your business gain more respect but it helps preserve the legal rights of your business.

So either you are a new business enterprise or you’ve been in business for a long but experiencing some financial difficulties, do not hesitate to make a report of that zero income. It will save you and your business from a lot of stress.

Conclusions

Experiencing little or no income as a startup LLC isn’t a new thing among business owners in the US. It is understandable if a business goes through some financial challenges in the beginning and even beyond, but it is risky if you fail to file your tax return whether an income is made within a period or not. Do you have any questions about filing taxes for your LLC or need help filing your taxes? Contact Foundeck here for help on how to go about this.