Does an LLC need to file a tax return? The answer is yes, even if a limited liability company (LLC) is inactive, meaning it has incurred no expenses or earned any income for the year. Even in these scenarios, the LLC will most likely still be required to file a tax return. 

Information About Filing a Tax Return for an LLC

  • Filing as an LLC allows you more flexibility when determining how business earnings will be taxed by the Internal Revenue Service (IRS).
  • The choice you make in how your business is taxed determines the tax rules your business will be subject to. 
  • With an LLC, there are no set rules in place. Per the IRS you are allowed to use tax rules applicable to those used for a sole proprietorship, corporation, or partnership.
  • A corporation is considered a separate entity, unlike an LLC, which is considered by the IRS to be a "pass-through entity" the same as a sole proprietorship or partnership. 
  • As a "pass-through entity," the profits are passed on to the owners, also referred to as members, of the LLC who will then file the profit figure with their personal taxes. 
  • While an LLC itself is not charged with the task of paying federal income taxes, there are states that charge the LLC with a tax.

Differences in Tax Elections for LLCs

An LLC that has one owner (member) is automatically disregarded for federal income tax by the IRS. In this case, the single owner/member would report the income and expenses of the LLC on their personal tax return. 

For LLCs operating with more than one owner, the IRS recognizes the business as a partnership. In this situation, an informational partnership tax return is filed by the LLC, and owners (members) file expenses and income on personal tax returns. 

If the owner needs to change the classifications, taxes can be filed as a corporation. When the business is formed, the classification can be chosen at that time, or at any time in the future. To do it after the business is formed requires Form 8832 be filed with the IRS.

For an LLC that retains a significant amount of its profits within the business, corporate taxation is a benefit. Taxes for the LLC are taxed based on the rate for corporations, and owners are not taxed on their personal income tax on profits retained by the company. 

If you convert your limited liability company to a corporation, for five years you will be ineligible to convert back to pass-through taxation.

Reasons to File a Separate LLC Tax Return

  • An LLC is the most common business type formed. Many are owned by a single person or in some cases a married couple. With married couples living in a community property state, the LLC is still considered owned by one person. 
  • Some owners find it more convenient that the IRS treats an LLC as a "pass-through entity" or "disregarded entity" since the IRS does not want a separate tax return filed by an LLC. The IRS is fine with the income and expenses from the LLC being reported on the single member's personal tax return.
  • If the LLC is owned by two people with one being someone other than a spouse, it is a multi-member LLC and a separate tax return must be filed. For some owners, filing a separate tax return comes across as more professional. 
  • A multi-member LLC would usually file taxes as a partnership unless the owners have chosen to have the LLC treated as a corporation. 
  • For financial transactions from a lender, it may be requested that the LLC file a separate tax return to qualify for a business loan. 
  • Should you need to apply for financial aid from the state, filing a separate tax return may have an impact on your eligibility. 
  • Ensuring the protection of assets is another reason for forming an LLC and the most common. It is another option to provide legal protection to the business. 
  • When looking at the percentage of audits by the IRS, personal tax returns are at a higher risk of being audited than corporations or partnerships. 
  • With direction from a tax professional, LLCs can provide tax savings in certain situations, which would be looked at by the tax expert on a case-by-case basis. 

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