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I classified my single member LLC as an S-Corporation to take advantage of the tax advantages for qualifying small businesses as an independent software contractor. This worked well while generating revenue; however, I ceased working under the LLC and am no longer generating income through the entity.

I'd like to preserve my LLC's name and brand, and be able to use it should I resume contracting work in the future; however, I am confused about my options going forward, especially since the business still has associated expenses for annual filings with the state and with keeping web domains.

So far research suggests:

  1. Dissolution and revocation of my S-Corporation status. If I pursue this, I can reorganize with my state (Michigan); however I cannot re-elect S-Corporation status for about 5 years according to 26 U.S. Code § 1362 (g). I suppose this means the LLC would need to be taxed as a C corporation which loses the tax advantages.
  2. Generate a minimal amount of revenue to profit. This could help prevent my business from being reclassified as a hobby by the IRS since I would never declare a loss.
  3. File a zero return for 1120-S? I don't even know if this one is possible since the there are clear expenses that the business must pay (e.g. annual filing and web domains). Is it allowed to omit tax deductions?

Option #3 would be ideal; however, from what I can tell, I must report all expenses on 1120-S, this would show as a loss and leave my business subject to being reclassified as a hobby. Option #2 is likely feasible, but truly I'd like to just pay a few dollars per year to keep the LLC inactive. For either option, I am aware I must continue to file Form 941 quarterly showing no wages paid, and filing 1120-S annually.

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I found an article on businesses taking a hiatus. To quote the article, "you must be able to present a set of facts indicating that you're sincerely looking for business."

If you are not interested in doing that, your option #3 should work: Filing an S-corp tax return as required without deducting business expenses.

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  • I'm a bit new to taxes, are you saying that there isn't a requirement to list expenses/deductions? I was under the impression that it's required.
    – Nicholas
    Feb 15 at 2:24
  • That's what I'm saying, to the best of my web research. Feb 15 at 2:26
  • Nice, I guess that's the meaning of A domestic partnership must file an information return, unless it neither receives gross income nor pays or incurs any amount treated as a deduction or credit for federal tax purposes. So, as long as I don't treat my expense as a deduction, and have zero reportable income, I should be all set.
    – Nicholas
    Feb 15 at 2:31
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I recommend dissolving your company and creating a new one in the future if you need it.

You don't need to worry about 26 U.S. Code § 1362 (g). That applies to the same corporation and it doesn't apply to a brand new corporation. Also, I'm pretty sure that law doesn't apply to LLCs. An LLC is a company but is not a corporation (despite the fact that it can confusingly be taxed as an S-corporation).

You also have concerns about preserving your "LLC's name and brand", but what is really needed to do that? How likely is it that someone else will start a business in your state with the same name? Also, for many types of businesses, owning the right domain name protects you a lot.

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  • I agree that owning a domain name, registering a fictitious business name, and/or securing a trademark are possibly cheaper options than keeping an LLC active. This depends greatly on state fees. E.g. California LLCs have an annual tax of $800. Feb 15 at 21:05

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