There are many reasons a business might not receive income. For example, if the business recently launched, the owner may still be in the process of finding clients or purchasing equipment. In other cases, no income is generated because the business is inactive, even if formal dissolution has not taken place. Whatever the reason may be, it’s important for business owners to understand their tax filing requirements, which differ depending on how the business is structured. Do LLCs Have to File Tax Returns if there is no income? If you’re a small business owner in California, and your company had no income this year, continue reading to learn whether you are required to file a tax return. Then, contact our Sacramento tax accountants for assistance with all of your bookkeeping, business planning, and tax preparation needs.
For income reporting purposes, there are three basic ways a limited liability company may be categorized:
- LLC Corporations
- LLC Partnerships
- Single-Member LLCs (Disregarded Entities)
LLCs and corporations are distinct business structures. However, an LLC may elect to be taxed as a corporation. (Alternately, LLCs may elect to be taxed as partnerships.)
It is mandatory for all corporations to file annual tax returns, even if the business was inactive or did not receive income. An LLC that chooses to be treated as a C corporation for tax purposes is required to file Form 1120 (U.S. Corporation Income Tax Return). If the LLC elects to be treated as an S corporation, Form 1120S (U.S. Income Tax Return for an S Corporation) should be filed instead. Taxpayers who file Form 1120S use Schedule K-1 (Shareholder’s Share of Income, Deductions, Credits, etc.) to report credits, deductions, and corporate income.
While some LLCs elect to be treated as corporations, others choose to be treated as partnerships. If an LLC elects to be treated as a partnership for tax purposes, and the business did not generate any income during the taxable year, it is generally not necessary to file a tax return, unless there are business expenses to be treated as credits or deductions. If so, it will be necessary to file Form 1065 (U.S. Return of Partnership Income).
Single-Member LLCs and Sole Proprietorships
If an LLC has only a single member, it is automatically classified as a “disregarded entity” by the Internal Revenue Service (IRS). Similar to a sole proprietor, a disregarded entity must report income using Schedule C (Profit or Loss from Business) of Form 1040 (U.S. Individual Income Tax Return).
If there is no income to report, it is unnecessary to file Schedule C, unless there are credits or deductions to clai