What Nobody Tells You When You Form an LLC

I had one of those days today.

Not a disaster. Not an emergency. Just one of those days where every time you think you’re done, the next thing is already waiting with its hand out. By the time it was over I had filed two tax returns, learned something I should have known a year ago, and spent money I wasn’t planning to spend. All before three o’clock in the afternoon.

Here is what happened and why I’m telling you about it.

When you form an LLC with two members — a husband and wife, two business partners, any two people — the IRS treats it as a partnership. That sounds like a technicality. It isn’t. It means you are required to file a separate business tax return every single year, a Form 1065, whether your business made money or not. Zero income. Zero expenses worth claiming. Doesn’t matter. The return is required because the partnership exists.

Nobody told me that when I formed The Faust Baseline LLC.

Not the Kentucky Secretary of State filing system. Not the confirmation email. Not the EIN application. Nobody handed me a sheet that said by the way, you now have a separate annual filing requirement with a March 15 deadline and a Kentucky minimum tax of $175 just for existing.

I found out today. Three weeks after the deadline had already passed.

The penalty for not filing a partnership return is roughly $220 per partner per month. Two partners. Twelve months. You do the math on what ignoring that looks like by the time someone figures it out.

I did not ignore it. I just didn’t know. There is a difference, but the IRS charges the same either way.

So today I filed the 1065. I answered every question TaxAct put in front of me — accounting method, entity type, business activity code, LLET nonfiling status, Kentucky officer information, K-1s for both partners showing zero income — and I paid the software cost to do it, and I paid Kentucky their $175 minimum for the privilege of having an LLC that made no money in its first year, and then my personal return got rejected because the IRS couldn’t verify my wife’s prior year AGI, which means I get to do that part over again once I track down a number from a return I filed fourteen months ago.

It was that kind of day.

Here is what I want you to take from it if you are running a small LLC or thinking about forming one.

A single member LLC — one owner — is simple. It’s a disregarded entity for tax purposes. It files with your personal return and mostly stays out of your way.

The moment you add a second member, everything changes. You are now a partnership in the eyes of the IRS and the state you operate in. That means a separate return, a separate deadline, separate software to file it, and in Kentucky a separate minimum tax that shows up whether you earned a dollar or not.

If you have a two-member LLC and you have not been filing a Form 1065 every year, go find out how many years you’ve missed. The penalty clock runs backward just as reliably as it runs forward.

The good news is that a zero activity partnership return is genuinely simple once you know it exists. It took me a few hours to work through it today for the first time. Next year it will take thirty minutes. The framework is established. The surprise is gone.

That’s what first years cost. Not just the formation fees and the EIN application and the copyright registration and the annual report to the Secretary of State. They cost the things you find out later that nobody put in the welcome packet.

Being a senior citizen on a fixed income, and you think after all the years you have it under control and you are doing allright…stop! and think that through again beacause this world today it is going to prove you wrong.

Now I know. Now you do too.

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