California LLC Advantages and Disadvantages

California LLC
Advantages and Disadvantages

California LLC Advantages and Disadvantages

California’s 2007 Business Tax Climate

California LLC Advantages and Disadvantages - California ranks 45th in the State Business Tax Climate Index. The Index compares the states in five areas of taxation that impact business: corporate taxes; individual income taxes; sales taxes; unemployment insurance taxes; and taxes on property, including residential and commercial property.

California LLC Advantages and Disadvantages

California LLCs classified as partnerships or disregarded entities are subject to an $800 annual tax if they are doing business in California, or the California Secretary of State accepts their articles of organization or certificate of registration. The annual tax is pre-paid for the privilege of doing business in California and is due on the 15th day of the fourth month after the beginning of the taxable year. LLCs must file a Limited Liability Company Tax Voucher (FTB 3522) to pay the annual tax.

If your company has high net profits, it will pay more tax with an S corporation. If your business has less than $250,000 you will pay less tax at the STATE level as an LLC. But you may pay potentially more in Self Employment Taxes and therefore it would make overall more sense to be an S corporation.

If you are operating at a loss, an S corporation would make sense to a certain point. If you have a business doing $900,000 a year and have a loss, you may be much more protected in an LLC and it may be worth spending the $2,500 in LLC fees to gain that protection over an S corporation.

If you are going have substantial profits it would make more sense to be an LLC, in excess of $700,000 in net profits.

Limited Liability Company (LLC)

The LLC is a relatively new type of hybrid business structure that is now permissible in most states. It is designed to provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. Formation is more complex and formal than that of a general partnership.

The owners are members, and the duration of the LLC is usually determined when the organization papers are filed. The time limit can be continued if desired by a vote of the members at the time of expiration. LLC's must not have more than two of the four characteristics that define corporations: Limited liability to the extent of assets; continuity of life; centralization of management; and free transferability of ownership interests.

California LLC Advantages and Disadvantages

Advantages of Limited Liability Company

Limited Liability: Owners of a LLC have the limited liability protection of a corporation.

Flexible Profit Distribution: Limited liability companies can select varying forms of distribution of profits. Unlike a common partnership where the split is 50-50, LLC have much more flexibility.

No Minutes: Corporations are required to keep formal minutes, have meetings, and record resolutions. The LLC business structure requires no corporate minutes or resolutions and is easier to operate.

Flow Through Taxation: All your business losses, profits, and expenses flow through the company to the individual members. You avoid the double taxation of paying corporate tax and individual tax. Usually, this will be a tax advantage, but circumstances can favor a corporate tax structure.

Disadvantages of Limited Liability Company

Limited Life: Corporations can live forever, whereas a LLC is dissolved when a member dies or undergoes bankruptcy.

Going Public: Business owners with plans to take their company public, or issuing employee shares in the future, may be best served by choosing a corporate business structure.

Added Complexity: Running a sole-proprietorship or partnership will have less paperwork and complexity. A LLC may federally be classified as a sole-proprietorship, partnership, or corporation for tax purposes. Classification can be selected or a default may apply.

California LLC Advantages and Disadvantages

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