What Happens if an LLC Makes No Money? – Avoid These Common Mistakes + FAQs

Confused about what happens if your LLC makes no money? You’re not alone. According to a 2023 Small Business Trends report, over 60% of small businesses either break even or lose money annually, leaving many owners unsure of their obligations when their LLC has zero revenue. In this article, we’ll explore exactly what it means for an LLC to have no income, and what steps (if any) you need to take to stay compliant and make the most of the situation.

What Happens When Your LLC Makes No Money? (Answering the Question)

When an LLC makes no money, the immediate good news is that it typically owes no income taxes for that period. No revenue means no profit, so there’s no income for the IRS or state to tax. However, making no money doesn’t exempt the LLC from all responsibilities. The exact implications depend on how your LLC is set up and where it’s registered:

• Federal Tax Filing: If your LLC had zero income (and no deductible expenses), you may not need to file a federal tax return for that year. For example, a single-member LLC (by default taxed as a sole proprietorship) with no income or expenses generally does not need to file Schedule C for that year. A multi-member LLC (taxed as a partnership by default) isn’t required to file a partnership return (Form 1065) if it had absolutely no income and no expenditures to deduct. However, if your LLC is taxed as a corporation (C-corp or S-corp), you must still file a corporate tax return even with no income. The IRS requires corporations to file annual returns regardless of earnings, so an LLC that elected S-corp status, for example, would file Form 1120S and simply report zero income (to avoid late filing penalties).

• No Automatic Dissolution: An LLC doesn’t automatically close or disappear just because it isn’t making money. If you formed an LLC and it’s inactive (no business activity), it will continue to exist as a legal entity until you formally dissolve it through the state. This means your LLC can essentially sit idle (sometimes called a dormant LLC) without revenue. Nothing inherently “bad” happens to the LLC at the moment it makes no money – it’s still an LLC in good standing as long as you fulfill basic maintenance like state filings.

• State Compliance and Fees: Even if no money is coming in, you may still owe state fees or taxes to keep the LLC active. Many states require LLCs to file an annual report or pay a franchise tax or renewal fee each year. These obligations often apply regardless of income. For instance, a California LLC must pay an $800 annual franchise tax minimum, even if the business had zero income. Other states might charge a smaller annual report fee (for example, $50-$100) or no fee at all, but almost every state expects an LLC to keep up with some yearly filing. If you make no money and skip these requirements, the state can impose late fees or even administratively dissolve your LLC after a period of non-compliance.

• No Income, But Possibly Expenses: It’s common for an LLC to have expenses but no income (for example, in a startup phase or a slow period). If you did incur business expenses with no revenue, you likely have a net loss. What happens then? For tax purposes, a net operating loss from an LLC can often be used to offset other income. In a single-member LLC, that loss would flow through to your personal tax return (potentially reducing your overall taxable income from a day job, for instance). In a multi-member LLC, the loss is split among the owners and can offset their other income. You would need to file a tax return to claim these losses. If you don’t file, you miss out on possible tax deductions or credits.

• Maintaining LLC Status: An LLC with no money is still a legal entity, so you should maintain it properly. This includes keeping a separate bank account (even if the balance is low), keeping the LLC in good standing with the state by filing required documents, and renewing any necessary licenses. Nothing drastic will happen immediately if you don’t have revenue—no one will come and “take” your LLC away just because it’s not profitable. But over time, failing to maintain the LLC (thinking it doesn’t matter since there’s no money) can lead to penalties or the loss of liability protection.

Bottom line: If your LLC isn’t making money, you generally won’t owe income taxes, but you should still stay on top of filings and fees. The exact actions to take depend on your LLC’s tax classification. A good rule of thumb is to treat an inactive LLC with the same care as an active one when it comes to compliance. This way you avoid any surprises (like fees or penalties) and keep your options open to ramp up the business when you’re ready.

Key Terms: LLCs, Taxes, and “No Income” Situations

Understanding a few key terms will help clarify what happens when an LLC has no revenue. Below are important concepts and definitions related to LLCs and taxes:

• Limited Liability Company (LLC): A business structure that offers personal liability protection to owners (called members). An LLC is a legal entity separate from its owners, meaning owners generally aren’t personally responsible for business debts. For tax purposes, an LLC isn’t a tax classification itself – it can be taxed as a sole proprietorship, partnership, or corporation depending on elections and number of members.

• Single-Member LLC: An LLC with one owner. By default, the IRS treats a single-member LLC as a “disregarded entity.” This means it doesn’t file a separate business tax return. Instead, the owner reports any business income or loss on their personal tax return (typically on Schedule C of Form 1040). If a single-member LLC has no income and no expenses in a tax year, the owner usually does not need to include a Schedule C for that LLC at all for that year.

• Multi-Member LLC: An LLC with two or more owners. By default, the IRS treats this type of LLC as a partnership for tax purposes. The LLC must file an informational partnership return (Form 1065) each year and issue K-1 schedules to the members, showing each member’s share of profit or loss. The members then report that on their personal returns. If a multi-member LLC has no income (and no deductible expenses) for the year, the IRS does not require a Form 1065 filing for that year. However, if there are any expenses or credits to claim, a return should be filed to report the resulting loss for the members.

• Disregarded Entity: This term refers to how a single-member LLC is treated for federal tax. A disregarded entity is ignored for tax purposes – it doesn’t file its own return because the IRS “looks through” the entity to the owner. The owner directly reports income or losses. Note: An LLC can be a disregarded entity to the IRS but still very much exists legally for liability and state law purposes.

• Pass-Through Taxation: A taxation principle where the business itself isn’t taxed on profits. Instead, income “passes through” to the owners’ personal tax returns. LLCs (unless taxed as a corporation) generally have pass-through taxation. So if an LLC makes no money, there’s no income passing through to the owners that year. If the LLC has a loss, that loss passes through to owners and can potentially reduce their other taxable income.

• Tax Classification (Elections): An LLC can elect to change its tax status. A single-member LLC or multi-member LLC can file Form 2553 to be taxed as an S-corporation, or Form 8832 to be taxed as a C-corporation. If such an election is made, the LLC must follow the tax rules of that classification. C-Corp taxation means the LLC files Form 1120 and pays corporate tax on profits (and must file even with no income). S-Corp taxation means the LLC files Form 1120S and passes income/loss to owners similar to a partnership (again, an S-corp return is required annually even if profit is zero).

• Inactive LLC: An informal term for an LLC that isn’t currently conducting business or earning income. “Inactive” or “dormant” LLCs have no revenue and possibly no expenses, but they are still legally in existence. An inactive LLC still must meet legal requirements like annual reports or taxes until it’s dissolved.

• Franchise Tax / Annual LLC Fee: Many states charge LLCs an annual fee or tax for the privilege of maintaining the LLC. This can be a flat fee or based on income (depending on the state). Importantly, some states charge a minimum franchise tax regardless of income. For example, California charges $800 annually even if your LLC made $0. Other states, like Delaware, charge a lower flat annual fee (Delaware LLCs pay ~$300). Some states only require a small annual report filing fee. Knowing your state’s rules is crucial so you’re not caught off guard by a bill even in a no-income year.

• Dissolution: The formal process of closing an LLC with the state. If you decide you no longer want the LLC (for example, if it’s making no money and you don’t plan to use it), you must file Articles of Dissolution (or a similar document) with the state. Once dissolved, the LLC is no longer active or required to file reports or pay fees. Simply having no income does not dissolve an LLC automatically; you have to take this step intentionally.

• Hobby Loss Rule: A tax concept (IRS rule) that distinguishes a business from a hobby. If an activity doesn’t show a profit in at least 3 out of 5 years, the IRS might label it a hobby rather than a business. Hobby expenses are only deductible to the extent of hobby income (you can’t claim a loss). This is important for an LLC making no money year after year – you need to demonstrate a genuine profit motive. Forming an LLC, maintaining a business bank account, and filing business tax returns (even with losses) are factors that show you’re running a business and not just a hobby.

With these terms in mind, let’s move on to concrete examples of how different LLC situations play out when no money is made.

Detailed Examples: When an LLC Has No Income (Real Scenarios)

Not all “no income” situations are the same. Here are several real-world scenarios illustrating what happens in different cases when an LLC makes no money, and how owners handled it:

Example 1: New Single-Member LLC with Zero Revenue

Scenario: Jane starts Jane’s Design LLC as a single-member LLC. She set up her business mid-year but didn’t land any clients or sales in that first year. She also kept expenses extremely low (just a few dollars on registering a domain name). Essentially, Jane’s LLC had no income and negligible expenses for the year.

What happens: For federal taxes, Jane does not need to file a separate business tax form. Because her LLC is a disregarded entity and had no reportable income or significant expenses, she can skip adding a Schedule C to her personal tax return for that year. There’s simply nothing to report — no revenue and only a trivial expense. (If she had larger startup expenses she wanted to deduct, she would file a Schedule C to claim a net loss. But she’ll likely just treat the small domain expense as a startup cost to deduct later when business picks up.)

Even though her LLC made no money, Jane still had to handle a couple of things:

• State Filing: She formed the LLC in her home state, which requires a simple annual report. She filed the report (listing herself as the agent and confirming the LLC’s address) and paid a $50 fee to keep the LLC in good standing.
• No Income Tax Due: Since there was no income, she owes $0 in income taxes for the business. She also doesn’t need to pay estimated taxes for that year for the business portion.
• Looking Ahead: Jane plans to ramp up marketing in the next year. She kept her LLC active so she can take on clients at any time. There were no penalties or issues with having zero revenue in year one, as long as she maintained the basic state requirements.

Example 2: Multi-Member LLC with No Activity

Scenario: Two friends form TechStartup LLC, a multi-member LLC (50/50 ownership) in July. They intended to develop an app, but funding fell through and they did no business and had no revenue by year-end. They incurred virtually no expenses aside from the small state registration fee when forming the LLC.

What happens: As a multi-member LLC, TechStartup LLC would normally need to file a partnership tax return (Form 1065). However, because the company received no income and had no deductible expenses, the IRS does not require a 1065 filing for that year. In other words, they had an inactive year for tax purposes.

The owners, Alice and Bob, confirmed:

• Federal Tax: They did not file a partnership return for the LLC’s first (inactive) year. There were no profits or losses to report to the IRS. This saved them the time and cost of preparing a zero-activity tax return. (They made sure that they truly had no deductible expenses. The initial state fee for formation isn’t deductible as a regular expense — it’s considered an organizational cost, which they can amortize later if needed.)
• State Compliance: They still had to meet state obligations. Their state requires a simple annual LLC renewal. Even for an LLC with no activity, the state expects a $100 annual LLC fee. They paid this fee to avoid the LLC falling out of good standing.
• No Penalties: By following the IRS rule (no income + no deductions = no return required), they avoided any late filing penalties. If they had mistakenly assumed they needed to file and then failed to, the penalty for not filing a partnership return can be steep (often calculated per partner, per month). Fortunately, in this zero-activity scenario, no filing was needed and no penalty was incurred.
• Future Plans: Alice and Bob are uncertain if they’ll continue the venture. They know that if they decide to abandon the business, they should formally dissolve the LLC to stop incurring annual state fees. For now, they keep the LLC open one more year to see if they can restart the project, knowing they might have to file taxes if there’s any financial activity next year.

Example 3: LLC with Expenses but No Revenue (Operating at a Loss)

Scenario: Maria runs a small part-time online boutique through Maria’s Trends LLC (a single-member LLC). This year, due to focusing on her day job, she didn’t make any sales at all. However, she did have about $2,000 in business-related expenses (inventory she purchased and some marketing costs). So, $0 income and $2,000 in expenses.

What happens: Maria’s LLC produced a $2,000 net loss for the year. Even though she made no money, filing taxes is beneficial in this case to claim that loss:

• Federal Tax Filing: Maria will file a Schedule C with her personal tax return, showing $0 gross receipts and $2,000 in deductible expenses. This results in a $2,000 loss on paper. Because her LLC is a disregarded entity, this loss will reduce her overall taxable income on her Form 1040. In essence, the loss from the business will offset part of her salary income from her day job, potentially lowering her tax bill for the year.
• Tax Outcome: She won’t owe any tax for the business (there’s no business profit), and in fact the business loss will give her a small tax benefit. Depending on her overall finances, that $2,000 loss might increase her tax refund or decrease what she owes personally.
• State Considerations: Maria’s state doesn’t have a separate LLC tax, only a modest $25 annual report fee. She files the report and pays the $25. There’s no state income tax on the business since it had no income.
• Important Note: Maria is mindful of the IRS hobby loss rule. This is the second year in a row her business has a loss and no revenue (last year she had a small profit, fortunately). She documents efforts to make the business profitable (she keeps records of product development and marketing plans) to show it’s a legitimate business. She plans on revamping her product line next year to try to earn income. As long as she can show a profit now and then (or a genuine effort to attain profitability), she can continue to deduct these losses. If she keeps losing money with no revenue for too many years, the IRS might question whether her boutique is actually a business.

Example 4: LLC in a High-Cost State with No Income

Scenario: John formed an LLC in California for a consulting side gig. He had big plans but ended up taking a full-time job and never pursued clients under the LLC. The LLC, John Doe Consulting, LLC, had no income and essentially no activity all year.

What happens: California is known for its annual franchise tax on LLCs. Even if an LLC has no revenue, California mandates an $800 yearly tax (with a first-year exemption for new LLCs formed in certain years, but let’s assume John’s LLC is past year one). Here’s how John’s situation unfolds:

• State Tax Bill: John receives a notice to pay the $800 LLC tax for the year. This is a flat fee for the privilege of having an LLC in California, unrelated to income. Since his LLC made no money, this $800 is an out-of-pocket cost with no offsetting business income. If John ignores this payment, the fee will accrue penalties and interest, and the state could eventually suspend or dissolve his LLC. He decides to pay it to avoid those consequences, even though it stings to pay $800 for an inactive business.
• Federal Tax: John’s LLC is a single-member LLC with no activity. Federally, he doesn’t need to file any separate LLC tax forms because there was no income or deductions to report. So at least there’s no IRS filing requirement or federal tax owed.
• Decision Point – Keep Open or Close: John evaluates whether to keep the LLC. Since California’s costs are high, keeping an unused LLC is expensive. He has two options: (1) Dissolve the LLC formally so that next year he isn’t charged another $800, or (2) keep the LLC open in case he wants to use it later, but be prepared to pay the annual fee. John decides to dissolve it. He files the necessary dissolution paperwork with California and pays a one-time $20 filing fee to close the LLC. By properly dissolving, he won’t be on the hook for next year’s $800 fee. If in the future he wants an LLC again, he can always form a new one.

These examples show that the implications of having an LLC with no money can vary. In summary: if you have no income and no expenses, compliance is relatively simple (just maintain state requirements). If you have no income but do have expenses, you’ll likely want to file tax forms to capture the loss. And always be mindful of state-specific rules that might cost you money even when the business isn’t earning.

Evidence and Data: LLCs with No Revenue by the Numbers

Data on small businesses shows that having a period of no revenue is quite common, especially in the early stages. Here are some key statistics and figures that shed light on how many businesses make no money or struggle to turn a profit:

• Most Small Businesses Aren’t Profitable Initially: Only about 40% of small businesses are profitable, according to a 2023 Small Business Trends report. Approximately 30% continuously lose money, and another 30% break even. In other words, 60%+ of small businesses make no net profit in a given year. An LLC reporting zero profit (or even a loss) is more normal than you might think.

Bar Chart: Small Business Financial Outcomes (Annual)

Each “#” represents about 2% of small businesses. This chart illustrates that a significant share of businesses either just cover their costs or operate at a loss each year.

• Startups and New LLCs Often Have No Income at First: It’s common for a new business to take 6 months to a year (or more) before generating revenue. During that time, the LLC is effectively making no money. In fact, many entrepreneurs report not paying themselves a salary in the first year. This is reflected in survival statistics – businesses that can’t eventually start making money often close down. According to the U.S. Bureau of Labor Statistics, roughly 20-25% of small businesses fail within their first year. Lack of revenue or profit is a primary factor in those failures.

• Business Survival Over Time: Many LLCs that start with no profits do begin earning later if they survive. Here is a look at business survival rates over time, which indirectly shows how many drop out (often due to financial struggles):

Line Chart: Small Business Survival Rates

• Year 1: ~77% survive (about 23% fail in the first year)
• Year 5: ~52% survive (48% have failed by the fifth year)
• Year 10: ~35% survive (65% have failed by the tenth year)

(Higher failure rates correlate with businesses that could not become financially viable.) An LLC making no money isn’t guaranteed to fail — many push through and become profitable later — but the longer it remains unprofitable, the harder it is to sustain.

• Prevalence of Inactive Businesses: Not every LLC is actively trading. The U.S. has millions of “non-employer” businesses (businesses with no employees, often single-person enterprises). Among these, a portion each year have little to no revenue. While exact numbers vary, it’s clear from tax data that hundreds of thousands of LLCs file tax returns showing zero income. Additionally, state business registries have many LLCs that remain registered but report no activity. This underscores that an LLC with no money in a year is not unusual.

• Cash Flow Issues Are a Top Cause of Failure: According to survey data (e.g., a report cited by SCORE and other small business organizations), 82% of small businesses that fail do so because of cash flow problems. This means they ran out of money or weren’t making enough consistently. So if your LLC isn’t making money, pay attention to cash flow and budgets — it’s a critical factor for long-term survival. However, in the short term, an LLC can be sustained with owner contributions or low expenses while revenue is zero.

In summary, the statistics show that it’s quite common for businesses (LLCs included) to experience periods of no profit or no revenue. Many small companies break even or lose money, especially in the beginning. The key takeaway from the data: Having an LLC that makes no money is normal, but it should be a temporary phase on the path to profitability, or a strategic pause, rather than a permanent state. Owners should use these periods to regroup, pivot the business model if needed, or decide on a graceful exit (dissolution) if prospects don’t improve.

Active vs. Inactive LLCs: A Comparison

What’s the difference between an active LLC and an inactive LLC in practical terms? Below we compare how various aspects differ when an LLC is actively earning income versus when it’s not earning (but still exists).

In essence, an active LLC is busy with business operations and all the tax and compliance duties that come with making money. An inactive LLC enjoys a lighter workload in some respects (no taxes or operational hassles like sales reporting), but it doesn’t escape basic obligations. Both active and inactive LLCs must mind their legal requirements. If your LLC is inactive, think of it as “paused” — it’s not generating income, but it must be kept in good order until you either wind it back up or shut it down.

Mistakes to Avoid When Your LLC Isn’t Earning

When your LLC isn’t making any money, it’s easy to make certain mistakes out of complacency or misinformation. Here are key pitfalls to avoid to ensure a no-income period doesn’t lead to bigger problems:

• Assuming “No Income = No Tax Filings At All.” Don’t automatically assume you can ignore tax filings just because you had no revenue. Mistake: Many owners skip filing required tax returns for an inactive LLC, then get hit with penalties. For example, if your LLC is taxed as an S-corporation and you don’t file a Form 1120S simply because you had no income, the IRS can assess a failure-to-file penalty (which can be $205 or more per owner, per month of lateness). Avoid it: Know your tax classification and file a zero-income return if required. When in doubt, consult a tax professional – a five-minute question could save hundreds in penalties.

• Ignoring State Obligations. It’s a common error to ignore state filings or annual fees when an LLC isn’t active. Mistake: Letting your LLC’s annual report or franchise tax lapse. This can lead to late fees, interest, or the state eventually administratively dissolving your LLC. In some states, once dissolved, reinstating an LLC can be costly (penalties and reinstatement fees) – and meanwhile, your business name might become available for someone else to grab. Avoid it: Mark your calendar for state deadlines. Even if you’re not actively doing business, file the required paperwork on time and pay the small fee. It keeps your LLC in good standing and prevents bigger headaches.

• Paying Unnecessary Costs. On the flip side of ignoring obligations, some owners keep paying fees for an LLC they don’t actually need anymore. Mistake: Continuing to pay hefty annual fees (like the $800 in California or expensive registered agent fees) for an LLC that you have no intention of using, essentially throwing money away. Avoid it: Periodically review if your inactive LLC is still part of your future plans. If not, consider formally dissolving it to cut off recurring costs. Just be sure to settle any final taxes or obligations before dissolution so you end on a clean note.

• Mixing Personal and Business Finances Because “Nothing’s Happening.” When an LLC isn’t active, owners sometimes become lax about the company’s bank account and records. Mistake: Using the business account for personal purchases or vice versa, simply because the business isn’t bringing in money. This can jeopardize the liability protection (piercing the corporate veil) since it shows you’re not treating the LLC as a separate entity. Avoid it: Even if your LLC is dormant, keep its finances separate. Maintain your business bank account with a small balance for business expenses only. This way, if the LLC is ever involved in a legal issue, you have a clear separation between business and personal finances.

• Failing to Claim Legitimate Losses or Deductions. If you spent money on your LLC (e.g., licensing fees, supplies, etc.) during a no-income period, you might be entitled to a tax deduction or to carry forward a loss. Mistake: Not filing a tax return and thereby missing out on recording a deductible loss. For example, if you had $5,000 of startup costs and no revenue, you could potentially deduct those (subject to rules) or at least start amortizing them, which can save you money in the long run. Avoid it: Just because the business made no income doesn’t mean your taxes should ignore the business entirely. If you have deductible expenses, file the appropriate forms to get the tax benefit. It can also help demonstrate to the IRS that you are actively trying to run a business (not a hobby).

• Procrastinating a Decision on the Future of the LLC. Some owners let an inactive LLC drag on for years in a kind of limbo. Mistake: Neither attempting to revive the business nor closing it, which can lead to years of paying fees for nothing, or conversely, accidentally losing the LLC due to forgotten compliance. Avoid it: Have a plan. If your LLC isn’t making money, decide how long you’re willing to wait or what milestones to see before making a change. Set a reminder for a future date to reassess: will you restart operations, pivot to a new idea, or dissolve? Being proactive prevents the situation where you suddenly discover your LLC was dissolved by the state or you’ve racked up avoidable costs.

• Misunderstanding the “Hobby” Issue. As mentioned, if your LLC never makes a profit and you keep deducting losses, you could run into trouble. Mistake: Thinking you can indefinitely write off losses without ever showing profit. Eventually the IRS may disallow your deductions by declaring the activity not-for-profit. Avoid it: Make genuine efforts to earn income. Document those efforts. If years go by without profit, consult a tax advisor. It might be time to pause deductions or reevaluate the business strategy. Remember, an LLC alone doesn’t prove a business motive — you need to act like a business aiming for profit.

By avoiding these common mistakes, you can ensure that your LLC’s no-income period remains a minor bump rather than a legal or financial pothole. Treat your inactive LLC with the same diligence as an active one, and you’ll be ready to either ramp up when the time comes or cleanly exit if that’s what you choose.

FAQs: Common Questions about LLCs with No Income

Q: Do I need to file a tax return if my LLC had no income?
A: It depends on the LLC’s tax status. Single-member LLCs with absolutely no activity usually do not need to file a separate return. Multi-member LLCs might skip filing if there were zero income and no expenses. However, LLCs taxed as S-corps or C-corps must file a return every year, even with no income, to avoid IRS penalties.

Q: Will I owe any taxes for an LLC that made no money?
A: No. If your LLC truly had no income, you won’t owe income taxes for it (since there’s no profit). You may still owe state fees or minimum taxes (some states charge a flat annual LLC fee regardless of income). Always check your state’s requirements, but purely from an income tax perspective, no income means no income tax due.

Q: Can I keep an LLC open if it’s not doing any business?
A: Yes. You can maintain an LLC indefinitely without revenue, as long as you fulfill state requirements (like annual reports and fees). The LLC won’t terminate just because it’s inactive. Many people keep an LLC “on the shelf” for future use. Just remember to keep up with compliance so it stays in good standing.

Q: Should I dissolve my LLC if it’s not making money?
A: It depends. If the LLC has no foreseeable business activity and is costing you in fees or hassle, dissolving can save you money and paperwork. However, if you believe the LLC might be useful in the future (and the maintenance cost is low enough), you can leave it open. It’s often easier to keep an existing LLC than to start a new one later, provided the carrying costs aren’t burdensome.

Q: Do I still have to pay the California $800 franchise tax if my LLC made $0?
A: Yes. California requires the $800 annual franchise tax for LLCs even if they had no revenue or are inactive (exception: in certain cases the first year might be exempt). If you don’t pay, penalties and interest will accrue, and the state can eventually dissolve the LLC. This is a key example of why knowing your state’s rules is important for a no-income LLC.

Q: Can I deduct expenses for an LLC with no income?
A: Yes. If you have legitimate business expenses and zero income, you can still deduct those expenses, resulting in a business loss. This loss can potentially offset other income you have (for example, from a job) on your tax return. Be sure you are running the activity with an intent to make profit in the long run; otherwise, the IRS might not allow continuous losses (hobby loss rule).

Q: Will my LLC be considered a hobby if it never makes money?
A: Possibly, if it goes many years with no profit and you continue to claim losses. The IRS uses the hobby loss rule to determine if an activity is a real business. Generally, if you show a profit in at least 3 out of 5 years, you’re safe. If not, they might scrutinize the activity. To avoid the hobby label, keep documentation that you’re trying to make it profitable (business plan, marketing, etc.). Simply having an LLC doesn’t automatically prove it’s a business — you need to demonstrate a profit motive.