A limited liability company (LLC) is one of the simplest and most common business structures. An LLC is organized at the state level, but there are annual requirements that are mandatory on the federal and local level as well. Annual compliance is necessary to retain the benefits that an LLC provides. Members of a non-compliant LLC may face penalties and fines and lose the liability protection afforded to them under the Articles of Organization.
Federal Annual Requirements
An LLC is not recognized for tax purpose at the federal level. Each LLC upon organizing must file a Form 8832 (Entity Classification Election), which allows the LLC to be recognized at the federal level as a corporation, partnership or sole proprietorship. If the LLC is a corporation then it must file an annual Form 1120 to pay income taxes. An LLC choosing to be recognized as a partnership must file an annual Form 1065, which is an informational statement showing partner income. Sole proprietorship LLCs will only have to file the proper Schedule C, Schedule D or Schedule E for declaring business income as part of the owner's regular Form 1040. These tax forms are a mandatory requirement for every LLC.
State Annual Requirements
LLCs are generally taxed as pass-through entities on the state level. This means any profits will be declared as income on the individual members' state tax forms. There are, however, filings beyond just taxes for an LLC at the state level. Many states now require an annual report as well as a form for a franchise tax. The annual report and franchise tax form must be filed (in applicable states) or the LLC can face administrative dissolution. This requirement allows the state revenue department to monitor which LLCs are still active and collect revenue in the form of a franchise tax.
Local Annual Requirements
An LLC also has filing responsibilities and tax requirements on a local level. Many county and city governments require an annual franchise report and may tax an LLC based on net income or gross receipts. Localities also may require an annual informational form to ensure that the LLC is still active within a particular jurisdiction. The annual requirements at the local level are varied and should be determined by each LLC before organizing.
