Tax and the Limited Liability Company (LLC)
Businesses usually take different forms and evolve constantly to keep its existence. One of the hybrids of the ever evolving business structure is the LLC (Limited Liability Company). The LLC has the characteristics of both the traditional corporate and partnership business entities. It can be owned by either an individual or a corporation.
The LLC’s appeal to business owners lies in the fact that the projected disadvantages are way more manageable than that of individual proprietorships or corporations. Some of the benefits that a business owner can get from establishing an LLC are:
- Less risk of losing assets. As the name itself states – limited liability. Investors of the company are not all held responsible for any debt or liability that the LLC incurs. Creditors can only pursue the investors who are personally liable for the debt.
- It is easier to establish an LLC.
- The partnership or corporation is not taxed as a single entity. Taxes are charged as personal income tax to the owners. Other term for this is “pass-through taxation.”
- Less red tape. There are not as much state-enforced requirements for LLCs unlike its counterparts such as the S-corporation and C-corporations business entities.
To be able to do business in California as an LLC, companies must register with the California Secretary of State (SOS) or else the company will not be recognized as an LLC. This applies to both local and foreign LLCs doing business in California. There are 2 options when registering an LLC:
- File it as a corporation
- File it as sole proprietorship
- For LLCs that filed as a corporation, a California Form 100 needs to be filed. Filing is every 15th day of the 3rd month after the close of the taxable year.
– LLCs can pay the tax owed in 4 installments. Payments are due dates are April 15, June 15, September 15, and December 15.
– LLPs (Limited Liability Partnerships) and LLCs (Limited Liability Companies) are not the same.
– For personal income tax filing purposes, company members are advised to estimate tax payments due.
– The annual minimum tax charged is $800 and the standard rate is 8.84 percent.
- For LLPs or disregarded entities, an $800 minimum tax is required to be paid to the FTB (Franchise Tax Board) and a fee that is dependent on the annual income.
– Has to file a California Form 568 (For companies who do business in more than one state)
– California Form 568 (LLC Return of Income, used with schedule R to allocate income between states).
– Fees are due on the 15th day of the 6th month.
The best step to do is always ask a good tax attorney who can help you about tax, obligations involved, forms and filing procedures .
LLC and tax
A limited liability company commonly referred to as LLC is a business structure that offers many advantages over other business structures especially for small businesses. The members of a LLC have liability protection similar to a corporation’s shareholders but are generally taxed at the individual level like a partner in a partnership. LLCs inCaliforniahave to pay federal andCaliforniataxes
Generally for tax purposes, single member LLCs are treated as sole proprietors and multi member LLCs are considered as partnerships unless the LLC opts to be treated as a corporation. If the LLC opts to be treated as a corporation, it will be taxed as a C corporation unless it chooses to be taxed as an S corporation. Once a LLC elects to be taxed as a corporation, it will be subject to all corporation taxes at both federal and state level.
All LLCs must file their income tax returns on Form 568. If the LLC has opted to be taxed as a C corporation, it must complete Form 100. LLCs that have opted to be taxed as an S corporation must submit Form 100S.Californialaw does not allow separate state election for tax purposes. Form 568 must be filed on the 15th day of the fourth month after the close of the year. If that day happens to be a holiday, then it must be filed on the next business day. There is six month extension beyond the return due date to file the form. This extension is automatic. However if the return is filed after six months of the return due date, the LLC will have to pay a penalty.
All LLCs – foreign and domestic, must register with the Secretary of State inCalifornia. This is one of the requirements for doing business in California. Domestic LLCs that fail to register will not be treated as LLCs and will loose the benefits of LLCs.
Multi- State Business
An LLCs doing business in more than one state must apportion its income on Schedule R. A LLC registered in California that does not do any business in the state nor have any source of income in the state may qualify under the reduced filing program.
Reduced Filing Program
If the LLC qualifies under the reduced filing program, it must submit Form 568 with all supplemental schedule along with California Schedule K1 (568). The California Schedule K1 (568) only be filed for members of the LLC who have a California address. On top of the first page of the Form 568, the words “SB1106 Filing” must be written in red. The total number of members including members who have a California address must be entered in Question J, Side 2 of the form.
LLC annual tax
In California the LLC minimum annual tax is $800. The tax rate is 8.84%. Any LLC that does business in California for at least one day of the year or is registered with the Secretary of State will be subject to annual tax which is payable on the 15th day of the fourth month after the beginning of the tax year. LLCs must submit the annual tax by filing Form 3522. Late payment will attract a penalty. An LLC with non residents as members must file FTB 3832
California charges a LLC fee based on the LLC’s total income from all sources including international operations. An LLC can claim a tax deduction on the LLC fees paid. LLC fees are considered ordinary and necessary business expense.
LLCs that have opted to be treated as corporations will be subject to estimated tax. The estimated tax is payable in four installments – April 15, June 15, September 15, and December 15. LLCs considered as partnerships or sole proprietors are also subject to estimated tax payable by the 15th of the 6th month.