Key Takeaways

  • An LLC does not need to earn income to maintain its legal status, but it may still have tax obligations.
  • LLCs can be taxed as pass-through entities, C corporations, or S corporations, depending on the chosen tax classification.
  • Even if an LLC has no income, it may still need to file tax returns to avoid penalties or maintain eligibility for tax benefits.
  • Deductible business expenses for LLCs include startup costs, marketing, travel, and home office expenses, among others.
  • LLCs taxed as pass-through entities may qualify for a 20% Qualified Business Income (QBI) deduction, reducing taxable income.
  • Proper tax planning, including setting aside funds for taxes and leveraging deductions, can help LLCs optimize their tax liabilities.
  • UpCounsel connects business owners with experienced attorneys to navigate LLC formation and tax matters.

Income from LLC

Getting income from LLC means that your company is making a profit.

An LLC, or “limited liability company,” is a type of business structure that is very attractive to small business owners who are looking to get the benefits of a corporation without having to follow as many formalities. An LLC is like a corporation in that it provides its owners, or members, with personal liability protection.

This means that an owner will not be held personally liable for an LLC’s debts or legal liabilities, and therefore, the owner’s personal assets cannot be reached by the LLC’s creditors (except in very narrow circumstances).

Do You Need to Make Income to Be Considered an LLC?

An LLC does not necessarily need to make any income to be considered an LLC. In fact, any small business can structure themselves as an LLC so long as they follow the state’s rules for forming one.

For tax purposes, however, if an LLC does not make any income, then the owner of the LLC is not allowed to claim any tax deductions on things such as business travel, promotion, or cost of inventory. If the Internal Revenue Service (IRS) sees that you are deducting business expenses but not making an profit, they will likely audit your business.

If an LLC does earn income, then that income will be “passed through” to the LLC’s owners for federal income tax purposes. A pass-through entity simply means that the LLC’s owners will only report the business’s income once, and that is on their personal tax return. The business itself does not pay income taxes.

Depending on how many owners the LLC has (single member or multi-member), or if it elects to be treated differently for tax purposes (like a C or S corporation), there are different ways an LLC will pay taxes.

Tax Filing Requirements for an LLC with No Income

Even if your LLC does not generate income, you may still need to file a tax return. The filing requirements depend on how the LLC is taxed:

  • Single-Member LLCs (Disregarded Entities) – If the LLC is not taxed as a corporation, it must still report its financial activity on Schedule C of the owner’s personal tax return. However, if there is no income or deductible expenses, a filing may not be necessary.
  • Multi-Member LLCs (Partnership Tax Treatment) – A multi-member LLC must file Form 1065 (U.S. Return of Partnership Income), even if no income was generated, to maintain compliance with IRS regulations.
  • LLCs Electing Corporate Taxation – If the LLC elects to be taxed as an S corporation or C corporation, it must file Form 1120S (S corporation) or Form 1120 (C corporation), regardless of income.

Filing a tax return even when no income is reported may be beneficial for several reasons, including:

  • Maintaining Compliance – Avoid penalties and demonstrate that the LLC is still active.
  • Claiming Tax Deductions – Some expenses may still be deductible even if the LLC has no revenue.
  • Establishing a Business for IRS Purposes – Helps prove the business is not merely a hobby, which is essential for future tax benefits.

An LLC Can Choose to Be Taxed Like a Corporation

If an LLC wishes to do so, it can request that the IRS treat it like a corporation for federal tax purposes. Corporations are afforded certain tax advantages that may seem beneficial to an LLC. For example, corporations have more favorable self-employment taxes compared to an LLC. With a corporation, the owner is treated like an employee and must be paid a reasonable salary. Any of the corporation’s profits after that salary is paid may not be subject to self-employment taxes.

If an LLC elects to be taxed like a corporation, it must fill out the Entity Classification Election form 8832, check the “corporate tax treatment” box, and file it with the IRS.

In 2018, C Corporations now pay a 21 percent tax on all of their profits. This tax rate is lower than the three highest individual tax rates, which range from 32 percent to 37 percent. By default, an LLC would be taxed this individual rate, whereas if they elect to be taxed like a corporation, they will benefit from the lower corporate tax rate.

However, the amount of money an LLC might save from paying a lower tax rate could become moot since it will now be subject to “double taxation.” Double taxation essentially means that the corporation must pay both the 21 percent tax on its profits, as well as its shareholders, or owners, individual income tax on their corporate gains.

Strategies for Reducing an LLC’s Tax Burden

Regardless of how your LLC is taxed, you can employ several strategies to reduce your tax burden:

  1. Leverage Deductions – Deduct expenses like office supplies, legal fees, marketing, and travel to reduce taxable income.
  2. Elect S Corporation Tax Treatment – If your LLC makes enough profit, electing S corporation status can help reduce self-employment taxes.
  3. Use Retirement Plans – Contributions to retirement plans, such as a SEP IRA or Solo 401(k), can lower taxable income.
  4. Hire Family Members – If applicable, hiring family members can provide tax advantages, such as reducing payroll tax liability.
  5. Take Advantage of the QBI Deduction – Many LLCs qualify for the Qualified Business Income (QBI) deduction, allowing them to deduct up to 20% of their net income.

Consulting a tax professional or attorney can help you determine the best tax-saving strategies for your LLC.

What Business Expenses Are You Allowed to Deduct?

As most people are aware, the majority of the costs the business incurs will not be subject to taxation. This is because business expenses are allowed to be deducted or “written off,” on your tax returns. This makes a big impact because those expenses can be deducted from the business’s overall income, which reduces the amount that the business must report to the IRS.

Business expenses that qualify as deductible include:

  • Initial startup costs
  • Business travel
  • Promotion and marketing costs
  • Cost of inventory

Starting this year, an LLC as a pass-through entity is qualified for a new deduction of up to 20 percent of the business’s net income on their tax returns. Thus, if the LLC’s income was $100,000, they will be able to deduct $20,000 from their income taxes.

Managing Estimated Taxes for Your LLC

LLC owners, particularly those in pass-through taxation structures, are responsible for paying estimated taxes throughout the year to avoid IRS penalties. Here’s what you need to know:

  • Who Needs to Pay? – If an LLC’s net income exceeds $1,000, owners must generally pay estimated taxes quarterly.
  • How to Calculate Estimated Payments? – Set aside 25% to 30% of your net income to cover federal and state taxes.
  • When Are Payments Due? – The IRS requires estimated tax payments on April 15, June 15, September 15, and January 15 of the following year.

Using a tax professional or accounting software can ensure that estimated tax payments are made correctly and on time.

Frequently Asked Questions

  1. Does an LLC have to make money to be valid?
    No, an LLC does not need to generate income to maintain its legal status. However, it may still have tax filing obligations.
  2. Do I need to file a tax return for an LLC with no income?
    It depends on how the LLC is taxed. Multi-member LLCs and corporations must file a return, while single-member LLCs may not need to file if they had no activity.
  3. How much should an LLC set aside for taxes?
    A good rule of thumb is to set aside 25% to 30% of net income for federal and state taxes, though this varies based on location and tax elections.
  4. What expenses can an LLC deduct to lower taxes?
    Common deductible expenses include startup costs, marketing, office supplies, travel, and home office expenses, as long as they are business-related.
  5. What happens if an LLC doesn’t pay taxes?
    If an LLC fails to pay taxes, it may face IRS penalties, interest charges, and potential loss of limited liability protection in extreme cases.

If you need advice on how to handle your LLC’s income, you can post your legal need (or post your job) on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.