Choosing between starting a corporation, partnership, or LLC is very difficult. Each has its own advantages and disadvantages. Most self-help guides available only focus on Federal tax consequences. As a result, I see new clients each year that are very confused about why California is sending them a tax bill for having an LLC. This guide will explain California’s rules a bit more.
For Federal tax purposes, a Single Member LLC is treated as a part of its owner’s taxes. This means that Single Member LLC’s are (usually) reported on Schedule C or E of the Owner’s individual tax return, Form 1040. These LLC’s don’t file separate federal tax returns. Most states follow the same treatment for State tax returns. One notable exception is California.
Single Member LLC’s doing business in California must pay the $800 Franchise Tax Fee, and potentially a $900 or greater LLC fee, depending on the Gross Revenues (the amount of cash the LLC received for sales before expenses). In addition, Single Member LLC’s must also file an information return with the Franchise Tax Board.
Many people assume that their LLC is exempt from these taxes if it was formed in another state such as Nevada or Delaware. There is an exemption for LLC’s under very specific circumstances. If your LLC meets any of the following criteria, it is not exempt from California taxes:
- The LLC is registered with the CA Secretary of State
- The LLC owns or rents Real property (land, or buildings) in CA
- The LLC has an office in CA
- The LLC pays employees or the owner does work in CA for the Business
These are the most common reasons why a business will be required to pay taxes to California, but there are others. Please contact us at (323) 380-8714 or Questions@EvansSvcs.com if you have any questions about LLC taxes, or any tax notice you receive.