California LLC
Advantages and Disadvantages

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's 2012 Business Tax Climate Ranks 48th

California ranks 48th in the Tax Foundation's 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. The ranks of neighboring states are as follows: Washington (7th), Oregon (13th), Arizona (27th), Nevada (3rd) and Hawaii (35th).

Tax Freedom Day Arrives on April 16 in California

Tax Freedom Day is the day when Americans finally have earned enough money to pay off their total tax bill for the year. In 2011, California taxpayers work until April 16 to pay their total tax bill (ranked 6th highest nationally), 4 days later than national Tax Freedom Day (April 12).

California's Top Individual Income Tax Rate Is 4th Highest in the Nation

With seven brackets and a top rate of 10.55 percent for those earning over $1,000,000. California's individual income tax has the third-highest rate and one of the most highly progressive structures in the nation. In 2008, California's state-level individual income tax collections were $1,531 per person, which ranked 4th highest nationally. Since most small businesses are S Corporations, partnerships, or sole proprietorships, they pay their business taxes at the rates for individuals. That makes California's taxes on small businesses some of the most burdensome in the nation.

California's Corporate Income Tax Rate is the Highest in the West

Corporations looking to relocate, or even establish, a business in the West may shy away from California, as the state's 8.84% flat rate is the highest corporate tax rate in the West. Nationally, only 7 states have a higher top corporate tax rate than California. In 2008, state-level corporate tax collections (excluding local taxes) in California were $325 per capita, which ranked 6th highest nationally.

California's Sales Tax Rate Is Highest in the Nation

California levies an 8.25% general sales or use tax on consumers, which is the highest in the nation and above than the national median of 5.85%. Local governments are also permitted to levy another 1.5%. In 2007 combined state and local general and selective sales tax collections were $1,502 per person, which ranks 15th highest nationally. California's statewide gasoline tax stands at 46.6 cents per gallon and is the 2nd highest in the nation, while its cigarette tax stands at $0.87 per pack of twenty (31rst highest nationally). Additionally, California's general sales tax and various municipal sales taxes are levied on the sale of gasoline. The sales tax was adopted in 1933, the gasoline tax in 1923 and the cigarette tax in 1959.

Property Tax Collections Slightly Below Average

Despite Proposition 13, California ranks in the middle of the pack when the states are ranked on combined state/local property tax collections. Proposition 13 favors people who have owned the same property many years by only permitting re-evaluations at resale. As in most states, local governments in California collect far more in property taxes than the state does. California's localities collected $968.01 per capita in property taxes in fiscal year 2006, the latest year for which the Census Bureau has published state-by-state data. At the state level, California collected $62.59 per capita during FY 2006. That brought its combined state/local property taxes to $1,030.60 per capita, ranked 28th highest nationally.


Tax Foundation

California LLC Advantages and Disadvantages

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