As we have previously discussed on this blog, a limited liability company (LLC) is the right type of business entity for many different types of companies starting in California. However, as a business owner, it is very important for you to understand the tax implications of forming an LLC in California so that you may plan your budgets accordingly and make sure you are in full compliance with the tax laws. The following is some information regarding taxation of an LLC.
Unlike a corporation, an LLC is not taxed as a separate entity from its owner or owners. Instead, the taxes “pass through” directly to the owners. This means that all profits and losses of the company are not reported on a tax return filed on behalf of the LLC itself, but instead they pass through to the owners and must be reported on each owner’s personal tax return. This means that you will not pay additional taxes for business income in general, but only for your share of the profits.
If you are the only owner of your LLC, you will pay taxes just like you would on a sole proprietorship. This means you will simply fill out and file a Schedule C on a 1040 tax return and pay taxes like any other self-employed person. If there are multiple owners of the LLC, each owner must report and pay taxes on his or her share. How profits are divided should be set out in the operating agreement of the LLC. The LLC will have to file a form 1065 so that the IRS can make sure each owner claims their profits correctly and pays adequate taxes.
In addition to personal income taxes, California applies an additional tax fee to LLCs based on the amount of earnings. These fees may be as follows:
- Less than $250,000 annual gross revenue = $0
- $250,000 – $500,000 annual gross revenue = $900
- $500,000 – $1,000,000 annual gross revenue = $2,500
- $1,000,000 – $5,000,000 annual gross revenue = $6,000
- More than $5,000,000 annual gross revenue = $11,790
This fee applies to both LLCs formed in California and to foreign LLCs gaining income from California.
These are only some of the tax issues that may apply to an LLC in California. If you are forming an LLC, you should always consult with an experienced business attorney who can guide you through the sometimes complicated business tax laws.