A limited liability company, or LLC, is a legal structure that provides businesses run by single owners or partnerships with increased legal and personal asset protections. Any small business can organize as an LLC, which can give owners different options for filing and reporting taxes. LLCs aren't required to have income or post profits, but if a business owner is claiming tax deductions through an LCC without reporting income, the IRS is likely to conduct an audit to determine if the LLC is an actual for-profit business.
LLC Tax Options
LLCs can be started by either individuals or partnerships, usually to separate an owner's business and personal finances. Unless an LLC elects to be taxed like a corporation, the IRS views it as either a sole proprietorship or partnership and requires the company's income to be reported on the individual's tax return. In these cases, the LLC isn't legally required to maintain an income or report a profit. While there is no IRS penalty on an LLC for not generating an income, states charge filing and annual fees to maintain an LLC.
Hobbies as a Business
Some people set up small businesses LLCs around hobbies and other profit-making activities they enjoy. These LLCs can deduct expenses and other losses from their taxes, but that could also attract attention from IRS auditors. If an LLC owner claims deductions but doesn't show income, the IRS will often conduct an audit. If the owner can't report the LLC making a profit in three of the last five years, or produce other evidence to show profit-making intent, such as marketing activities or business development, the IRS could deem the LLC to be a hobby, not a business, and deny tax benefits.
Read More: Is a Business License Needed to Form an LLC?
Terry Lane has been a journalist and writer since 1997. He has both covered, and worked for, members of Congress and has helped legislators and executives publish op-eds in the “Wall Street Journal,” “National Journal” and “Politico." He earned a Bachelor of Science in journalism from the University of Florida.