LLC Tax in California

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LLC Tax in California Overview

This article is an overview of LLC tax in California for small business owners.

What is an LLC?

LLC is a hybrid commercial entity that combines aspects of partnerships and corporate structures.

Please note that when you register an LLC in California you may have to pay the minimum annual franchise tax which is currently $800.

 

Why Use an LLC?

The main advantage of an LLC is that, like the owners of civil law corporations (shareholders), the liability of the owners (members) of LLC for the debts and obligations of the LLC is limited to its financial investment.

However, like a general partnership, the members of the LLC have the right to participate in the administration of the LLC, with profits or losses that reach its members.

Certain types of firms that provide professional services that require a professional state license, such as law or medicine, cannot create an LLC form.

 

LLC Classificaitons

For LLC tax in California, LLC will be classified as a partnership if it has more than one owner and will be treated as an undisclosed entity if it only has one member.

However, an LLC is allowed to choose to be treated (for tax) as a corporation.

To impose taxes as a corporation, the LLC files an election on the Federal Form 8832, Entity Classification Choice, with the Internal Revenue Service.

California complies with federal classification regulations for entities called “check box regulations” that allows LLC to pay taxes as a corporation.

 

Key Features:

  • LLC is a hybrid business entity that can be treated as a partnership, but has limited liability protection under civil law.
  • The LLC is created by “articles of organization” submitted to the California Secretary of State before it does business. Businesses outside the LLC’s state in California must register with the Secretary of State.
  • The formation of LLC is simpler and faster than a civil law corporation to establish and maintain.
  • Or before or after presenting their organizational articles members must enter into a verbal or written operative agreement. A formal agreement in writing is recommended.
  • In general, the LLC is administered by the partners, unless the members agree to have a manager to handle the business affairs of the LLC.
  • The LLC may have two or more owners, and may have different kinds of owners.
  • In addition, the LLC can be any person or business entity owned by the LLC.
  • If the LLC has more than one owner, it will be treated as a partnership (subject to Subchapter K), unless it is chosen as a corporation.
  • The elements of income, deductions and credits flow from the LLC to California in each K-1 Program, Income from Shares, Deductions, Credits, etc., and property distribution, payroll and sales shares.
  • Each member is responsible for paying taxes on their share of distribution. If the LLC has an individual member, it will be treated as an undisclosed entity and will be treated as an individual loyalty or as a division of its owner, unless you choose to be taxed as a corporation.
  • A husband and wife of LLC may choose to be treated as a partnership or as an undisclosed entity.

 

How Much Tax Do LLC’s Pay?

If the LLC decides to be taxed it as a corporation, it is subject to the corporate tax law and filing requirements.

To learn more about the exact tax rates visit UpCounsel.

In general, each owner is protected from individual liability for the responsibilities and obligations of the LLC.

LLCs do not issue shares and are not required to hold annual meetings or keep written minutes, which a corporation must perform to preserve the liability shield for its owners.

In general, LLC members who pay taxes as a corporation may share the profit and loss agreement in any manner in accordance with Subcategory K.

LLC members classified as a profit and loss corporation receive the same form as the corporate shareholders.

There are additional filing guidelines that may apply to you:

  • Return Due Date Change
  • LLCs Treated As Partnerships
  • LLCs Treated As Disregarded Entities
  • LLCs as Partnerships or Disregarded Entities
  • LLCs as Corporations

This concludes this introduction to LLC tax in California and I hope that you found it helpful.

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