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:

1. LLC Corporations
2. LLC Partnerships
3. Single-Member LLCs (Disregarded Entities)

LLC Corporations
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.

LLC Partnerships
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 claim. However, even if the taxpayer does not file Schedule C, he or she must still file Form 1040 if he or she obtained income from other sources.

Filing Requirements for Corporations and Partnerships without Income
The tax filing requirements for corporations and partnerships depend partially upon whether the business is foreign or domestic. A domestic corporation or partnership is an entity that does business in the state where it was formed. A foreign corporation or partnership is an entity that operates in a different state, or in some cases, a different country from where it was formed.

As noted above, both S corporations and C corporations are generally required to file an annual tax return. However, exceptions might apply depending on whether the corporation is foreign or domestic. For example, certain domestic corporations may be exempt from income reporting requirements under 26 U.S. Code § 501(c)(3). However, as the IRS notes, a foreign corporation is typically required to file a tax return “even if it has no income effectively connected with the conduct of a trade or business in the United States during the taxable year.”

Do LLCs have to file tax returns if they do not earn any money? As mentioned previously, it is not necessary for a domestic partnership to file a tax return if the domestic partnership neither receives income nor intends to claim credits or deductions. Even if a foreign partnership has no income, it is mandatory to file a return if the business (or its U.S. partner) makes an election – for example, to amortize organization expenses.

Even if your small California business did not earn income this year, you might still be required to file a tax return. However, the rules differ depending on where your business operates, whether you are claiming credits or deductions, and whether your business is structured as an LLC, partnership, corporation, or sole proprietorship.

Regardless of its size, structure, or place of incorporation, it is critical to ensure that your business complies with the pertinent reporting requirements. Failure to file tax returns, or to meet other standards established by the Internal Revenue Code, can result in the imposition of financially debilitating civil penalties. In cases where violations are determined to be “willful” or deliberate, a criminal investigation could even result.

Talk to someone in the Law Offices of Beyer, Brown & Rosen to find out what options would be best for you.