Does Your LLC Need To Pay Taxes if You Didn't Make Money?
There are numerous reasons you may want to register your business as an LLC, the primary motive being liability protection. When you run an LLC (limited liability company), you can avoid personal penalties for any debts your business runs into. That means that creditors can go after your company's assets but cannot touch any property in your name.
Other benefits of owning an LLC include easy startup and management flexibility. There are also tax advantages. For example, limited liability companies don't pay taxes on business income. You can also choose how you want your business to pay taxes.
While LLCs offer numerous privileges, you may get worried about your tax obligations for periods you didn't make any money. While it makes sense not to pay taxes for an LLC with no activity, is that the law? Are there any special tax regulations for businesses suffering losses?
This article will provide answers to these questions.
How Do Limited Liability Companies (LLCs) Pay Taxes?
The Internal Revenue Service (IRS) treats an LLC as a corporation, partnership, or disregarded entity for tax payment purposes. We'll explain what this means for your company in relation to the different payable taxes.
Income Taxes
Income taxes are fees your business pays from the income it generates. By default, LLCs are single-member if you're the sole owner or multi-member if it has two or more owners.
Even though LLCs have existed in the US for over 40 years, the IRS has never created a tax classification for LLCs, so their classification defaults to something the IRS already has a classification for. Your Limited Liability Company may be classified by the IRS as a sole proprietorship or partnership when it’s time to pay taxes and it’s understandable that this is confusing to newcomers. But don’t worry, we’ll explain more below.
Single-member LLCs default to disregarded entities while multi-member are pass-through entities and default to partnerships. This means that for federal income tax purposes, they don't exist, or their taxes will transfer to the members/owners personal taxes. As a result, single-member LLCs will pay taxes similar to sole-proprietorships, while multi-member LLCs will pay like partnerships.
LLCs that don't want to be classified as sole-proprietorships or partnerships can elect to pay taxes as S or C corporations. S-corporations pay taxes like limited liability companies since they're also regarded as pass-through entities.
However, C-corporations will pay taxes as entities. This means they will pay taxes on their taxable income and file corporate income tax returns. Therefore, the owners in a C-corporation will also pay taxes on their personal earnings.
LLCs still have to pay taxes on the state level. However, the states will typically follow their elected federal income tax classifications. So if you pay federal income tax as a multiple-member limited liability company, you'll pay state taxes like a partnership.
Payroll Taxes
If your LLC has employees, you'll have to withhold and pay payroll taxes from your employees' checks. Payroll taxes comprise social security taxes, medicare taxes, and unemployment taxes that finance unemployment benefit programs.
Franchise Taxes
Specific businesses will pay franchise taxes just for being limited liability companies in some states. This is regardless of whether they are disregarded or pass-through entities. Other names for franchise tax include excise, registration, privilege, or license fees.
Self-Employment Taxes
Although LLC members are not employees, they will still pay the IRS's Medicare and social security taxes. The Self Employment Contributions Act (SECA) provides for this.
Sales Taxes
Sales taxes are levies on the tangible personal property and taxable services that your business sells. You will collect these taxes from your buyers and remit them to the appropriate tax bodies.
Do I Have To File Taxes for an LLC With No Income?
There are many reasons you may not earn income in a tax year. For example, maybe you've stopped business operations but haven't concluded Articles of Dissolution filings. It's also possible that you've formed your LLC but aren't operating yet. Regardless of the situation, you may still have to file taxes (report your finances) even if you made no money.
Generally, so long as your business still exists, it doesn't matter if you're making huge profits or massive losses. Instead, the main determining factor is your tax election.
Single-member limited liability companies don't have to file returns if there are no income or expenses that qualify for deductions or credits. The same applies to multi-member LLCs that are taxed like partnerships.
They don't have to file an informational partnership tax return on tax form 1065 if there are no qualifying deductions or credits. However, C or S corporations must file income tax returns on taxable incomes if they're not expressly exempted.
Furthermore, while you may avoid filing federal LLC tax returns, you may still need to do this at the state level. To be sure, you can check with your state tax authority. For example, if you registered your business in Texas, you can get credible information from the Comptroller of Public Accounts.
Taxes are a universally accepted way for the government to generate revenue to fund several activities. Besides paying taxes, proper record-keeping, documentation, and filing are essential for accountability. Therefore, your limited liability company should still file tax returns even if you didn't make any money.
A good rule of thumb is always to file taxes whenever you're confused. If you had no obligation to file, there's nothing to lose. However, neglecting to file when you had a responsibility to do so carries adverse consequences, as you will soon discover.
Late Filing and Late Payment Penalties
IRS expects limited liability company members to pay quarterly taxes by April 15, June 15, September 15, and January 15 yearly. The deadline to pay corporate tax returns for C corporations is March 15.
A late filing of your tax returns may attract harsh penalties. So, it's wise to start your tax preparations as early as possible to avoid sanctions and last-minute rushes.
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