I have been creating graphics—it’s a hobby but I am making money. I may seriously consider starting my own business in the next year. I’d like to register my LLC and sit it until I get serious about the business. Will there be some any tax consequences?
When forming a business, entity choice is very important to consider for liability protection. Limited liability company, or LLCs, provide their owners protection from the claims of business creditors. For tax purposes, LLCs are considered partnerships. The company issues each member a Schedule K-1 at the end of each year, showing his share of the business’s profit or loss. The owner then reports the income on Form 1065 U.S. Return of Partnership Income. If an LLC has only a single individual owner, the LLC will be treated as a sole proprietorship for federal income tax purposes. Profits and losses are reported on your individual return.
When forming a business, you have more than entity structure to consider. You need to treat the business like a business, and run all expenses through a bank account exclusive to the business. Accurate accounting records are very important; otherwise, you may have a nightmare on your hands come tax time. If you run expenses through your own checking account, on paper, your business doesn’t look like it exists. This may also affect your liability protection. You also need to consider insurance and financing. If your business requires start-up costs, you need to consider how you will obtain those funds.
Business endeavors should be taken seriously, so we don’t recommend you do this half way. Nor do we recommend starting a business just to run a bunch of expenses through the entity to claim a write-off. At some point, you need to show a profit, otherwise you may be subject to hobby loss rules. The hobby loss rule states that if an activity is profitable in three years out of five then it can be treated as a business in the one or two year(s) that a loss was realized.
At Henssler Financial we believe you should Live Ready, and that includes understanding the tax consequences of starting a business. If you have questions regarding your tax situation the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at firstname.lastname@example.org.