So you recently launched an LLC by yourself and aren’t sure how to report your federal taxes or what to do if the company doesn’t take off?

Well, I got news for you…you aren’t the first to have these concerns…In fact, this is actually a common concern for newbie single owner LLCs.

Most of the confusion usually arises from the fact that your are considered a LLC from a legal perspective but in most cases are treated as a sole proprietor for tax purposes.

How Should Your LLC be Treated For Tax Purposes?
You can be classified as either a disregarded entity (i.e. sole proprietor) or corporation for tax purposes BUT legally maintain LLC status. Legally, this means that generally there is a clear separation between you and the LLC if a lawsuit should be filed. As a disregarded entity you are treated as a sole proprietorship for tax purposes and would simply report income and expenses on Schedule C of your 1040 personal tax return. To be treated as a corporation you need to file Form 8832 and elect to be classified as a corporation. You would be required to file tax form 1120 as a corporation.

What Happens if The Business Never Takes Off & Your Situation Changes?
Well, it is wise to think ahead in case things don’t work out with your business. If things don’t work out and you are considering dissolving the LLC, we have to warn you that this can be a timely and costly task. So if you want to be a smartmoney person, proper preparation and planning is very important. You will want to consult with a tax consultant & legal counsel if the situation should arise. Make sure you do an extensive search because this is one of those topics that can get complicated. The last thing you would want to happen is to become part of an audit which can definitely put a damper on your life. Also, keep in mind that each state has its own process for what is required to effectively terminate the existence of a LLC, you will want to refer to your specific state laws.

Please note that the IRS requires a Corporation to file Form 966 30 days after a planned dissolution. Also, there is specific dissolution process for each state which requires filing an article of dissolution. There can be changes each year to the process so be sure to inquire with your state. Good luck to you in your endeavor!

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