Are llcs taxed as corporations in california [With Pictures]

Last updated : Aug 9, 2022

Can an LLC be taxed as an S Corp in California?

An introduction to S Corp taxation Then, you can choose S Corp tax status by filing an election with the IRS (Internal Revenue Service). If you're in California, this means that if you form an LLC or corporation, you have the option of using S corporation status for taxation.

How are LLCs taxed in California?

Every LLC that is doing business or organized in California must pay an annual tax of $800. This yearly tax will be due, even if you are not conducting business, until you cancel your LLC. You have until the 15th day of the 4th month from the date you file with the SOS to pay your first-year annual tax.

Is an LLC a corporation in CA?

All LLCs and foreign LLCs must pay California taxes to the California Franchise Tax Board (FTB) if 1) they are organized in California, registered in California, or conduct business in California; and 2) they have not elected to be taxed as a corporation—that is, they are taxed as a partnership or sole proprietorship ( ...

How do I avoid LLC tax in California?

Can I avoid the California Franchise Tax? There's no way for a registered business to legitimately avoid the California Franchise Tax. Sole proprietors and general partnerships don't have to pay the California Franchise Tax, but they also don't have any personal liability protection.

Should my LLC be taxed as an S corp?

Although being taxed like an S corporation is probably chosen the least often by small business owners, it is an option. For some LLCs and their owners, this can actually provide a tax savings, particularly if the LLC operates an active trade or business and the payroll taxes on the owner or owners is high.

Which is better LLC or S corp for California?

The Advantages of S Corps As an LLC, it will have to pay an $800 annual minimum tax with a $6,000 LLC fee totaling $6,800. Meanwhile, an S Corp will only pay $2,250 of S Corp tax based on the 1.5% tax rate. Choosing to be an S Corp can provide tax savings to the owners for self-employment tax purposes.

How can an LLC avoid double taxation?

Retaining corporate earnings. You can avoid double taxation by keeping profits in the business rather than distributing it to shareholders as dividends. If shareholders don't receive dividends, they're not taxed on them, so the profits are only taxed at the corporate rate.

How does an LLC avoid paying taxes?

A general Corporation making a Subchapter “S” Election or an LLC with or without a Subchapter S Election pays no federal tax on its taxable income and no employment taxes on its distributions to stockholders.

Does a California LLC file a federal tax return?

LLCs are treated as disregarded entities by the federal government and are not taxed. The only taxes paid are by the members of the LLC. They can file using Form 1040 for single-member LLCs, IRS Form 1065 for LLCs treated as partnerships, or IRS Form 1120 for LLCs treated as corporations.

What is the difference between an LLC and a corporation in California?

A California LLC generally offers liability protection similar to that of a corporation but is taxed differently. Domestic LLCs may be managed by one or more managers or one or more members.

Is an LLC a corporation?

A Limited Liability Company (LLC) is an entity created by state statute. Depending on elections made by the LLC and the number of members, the IRS will treat an LLC either as a corporation, partnership, or as part of the owner's tax return (a disregarded entity).

What are the 3 types of LLC?

• Single-member LLC for the sole-proprietorship (solo entrepreneur)
• Multi-member LLC (member-managed LLC or manager-member LLC)
• Domestic LLC and Foreign LLC.
• Series LLC.
• L3C Company (low-profit LLC)
• Anonymous LLC.
• Restricted LLC.
• PLLC and LLC.

Why are California LLC fees so high?

Every business pays the $800 annual franchise tax, which is applied to taxes owed, but LLCs are the only ones subject to California Gross Receipts tax. This is one of the biggest reasons why a California LLC is so expensive.

Should I pay myself a salary from my LLC?

Do I need to pay myself a salary? If you're a single-member LLC, you simply take a draw or distribution. There's no need to pay yourself as an employee. If you're a part of a multi-member LLC, you can also pay yourself by taking a draw as long as your LLC is a partnership.

What is the minimum corporate tax in California?

Every corporation that is incorporated, registered, or doing business in California must pay the $800 minimum franchise tax.

Why would someone use an LLC instead of an S corporation?

Another advantage of the LLC is that there is greater flexibility in splitting up financial interests. Owners of LLCs can allocate profits and losses disproportionately among owners; an S corporation's profits and losses must be allocated strictly based upon ownership percentage.

When can an LLC elect to be taxed as a corporation?

An LLC can change its tax status and elect to be taxed as an S corporation. You'll need to file IRS Form 2553 with the IRS. The LLC must elect to be taxed as an S corporation no more than two months and 15 days after the beginning of the tax year when the election is to go into effect.

Is my LLC an S or C Corp?

An LLC is a legal entity only and must choose to pay tax either as an S Corp, C Corp, Partnership, or Sole Proprietorship. Therefore, for tax purposes, an LLC can be an S Corp, so there is really no difference.

Do you have to pay the $800 California S Corp fee the first year?

California law generally imposes a minimum franchise tax of $800 on every corporation incorporated, qualified to transact business, or doing business in California. A corporation that incorporates or qualifies to do business in California is exempt from paying the minimum franchise tax in its first taxable year.

When should I convert from LLC to S Corp?

The right time to convert your LLC to S-Corp From a tax perspective, it makes sense to convert an LLC into an S-Corp, when the self-employment tax exceeds the tax burden faced by the S-Corp. In general, with around $40,000 net income you should consider converting to S-Corp.

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what's going on guys Alex here and today I'm answering your tax questions from reddit now today's question has to do with an LLC that's elected to be taxed as an S corporation in California the subject is California LLC elected as an S corporation first year tax questions that first year can be kind of tricky and this is asked by Oh barely a very dramatic username all right just form the California LLC this year back in March elected it to be treated as an S corporation by filing the corresponding form with the IRS a bit confused about a couple of things and hope someone could clarify it for me please and here's a list of beautiful amazing questions so to spare you guys in reading all of these I'm going to address them one by one so the first question my understanding is that the business entity should be referred to as an S corporation from now on even though was formed as an LLC and the name ends an LLC correct however when I go to the LA California rather a Franchise Tax Board website to pay the taxes I have to select the entity type is LLC otherwise it won't identify the entity properly so here's an important distinction with regard to S corporations you cannot form an S corporation at the state level it just can't happen it doesn't exist as an option instead you would form an entity such as a corporation or in your case an LLC then you make an election to have a treated as an S corporation for income tax purposes so essentially the S corporation concept is an income tax concept not a legal concept at the state level states don't recognize that they essentially just have LLC's or corporations LLC's things like that and then you make the S corporation election so in terms of referring to your entity it depends on if you're referring to it from a legal perspective or from a tax perspective because the fact that it was formed an LLC that doesn't change it still remains to be an LLC for from a legal perspective but from a tax perspective it may very well be the case that you have an LLC that's taxed as an S operation alright so it does not become an s-corporation at the state level this is why it's kind of confusing in that you have an LLC but it's taxed as an S corporation you don't have an S corporation this is why you're running into the issue on the California website in that they're asking you for the name of your entity that didn't change so it still is whatever your entity is LLC that is the same but from an income tax perspective your entity will be treated differently and we're gonna go into what that means so it's important to separate the legal side of things from the income tax side okay so question to all LLC's slash corpse in California are subject to a $800 franchise tax per year this tax is payable up front ie due within the first three point five months at the start of the year correct so in essence it is due up front okay so California if they want their $800 they're not gonna wait the entire year for it they want it up front in many cases so it would be the case that if you're subject to the franchise tax of $800 it's a safe bet that it's due right at the beginning of the year depending on the entity type the specific date may vary but typically within the first quarter you're paying that $800 minimum amount which I will get into more on the next question here question 3 all s Corpse are also subject to be a 1.5 percent tax on profits do 3.5 months after the end of the year correct however I've also seen it referred to as the 1.5 percent franchise tax with a minimum of $800 so is a a part of B or is a in addition to B for example let's say the profit for the year is a hundred thousand do I owe California 1500 which would be 1.5 percent of the hundred thousand or is it 2300 is the eight hundred plus the 1.5 percent of a hundred thousand welcome to taxes in California are you enjoying yourself well join though many ranks of California business owners who have to deal with this and I could tell you they they love it they enjoy it all the time right so the way that the Franchise Tax is laid out in California for S corporations its 1.5% of profits you have that and it's an $800 minimum Franchise Tax so if we look at some of these websites related to S corporations that are useful on the FTB side of things here one of them is this site right here let me pop this into the chat and it says here for corporation tax return and payment deadlines as far as S corp scope the minimum franchise tax is that $800 so it's important to keep that word minimum in mind because it is instrumental understanding how all this plays out now when they refer to a fee you don't have to worry about that if you're an S corporation for the entire year because that fee is only generally applicable to LLC's that are taxed as LLC is not is S corp so forget about the feet don't worry about the fee for now furthermore if we look on the booklet for forum 100's you can get this on an FTP website and also drop a link in the chat you'll see that the S corporation must pay estimated tax using form 100 es corporation as the rena tax simple enough and corporations are required to pay the following percentages of estimated tax liability during the tax year and you'll see that it says 30 percent for the first required installment let me make this a little bigger okay here we go the estimated tax for S corporations has to be paid in the schedule of 30 percent from the first required installment forty percent for the second no estimated payment for the third and then 30 percent for the fourth so this is how it would work in a typical fashion if you have an S corporation with millions of dollars of net income in a particular year then this would be applicable however you can also run into the situation where you oh s tomatoe payments throughout the year but you don't have enough to satisfy that $800 minimum on that first payment date so what happens there for franchise tax filers it says if the amount of estimated tax does not exceed the minimum franchise tax plus any Q sub annual tax don't worry about that for now then the entire amount of the minimum tax is due as an estimate on ER before the 15th day of the fourth month of the Corporations taxable year and if the amount of estimated tax exceeds the minimum franchise tax then the estimated tax is payable in four installments however to avoid the imposition of an estimated tax penalty at least the minimum franchise tax must be paid by the due date of that first installment all right so very important to keep in mind is that they do want their money upfront they don't want to wait for it and if you're not making millions upon millions of dollars in that income and your S corporation you may run into that hiccup where you can't use that thirty percent forty percent allocation you have to stick to this guideline right here and that you may need to make that $800 payment right upfront at the beginning of the year and take care of the balance afterwards all right so to answer that question that one point five includes that 800 in that bet 800 is the minimum so if that 1.5% is less than 800 then you pay 800 but if it's

Thanks for your comment Sean Teuscher, have a nice day.
- Consuela Staudt, Staff Member

in this video i'm going to discuss four scenarios in which you do not want your business to be taxed as an s-corporation that's right you heard me right i said not be taxed as an s-corporation there's so many videos out there promoting the s-corporation and why it's so great and it is it can save you a lot of money in self-employment taxes but you must also know what the drawbacks are it doesn't fit every single business owner out there so i'm going to touch on the following four scenarios one is how much profit should you be earning in your business before it makes financial sense to have your business taxed as an s corporation the second one would be how large amounts of w income sorry w-2 income rather can negate the tax savings of an s-corporation so by w-2 income i mean you are employed by an employer and actually like have a job that you earn money at what happens when your state that you live in does not recognize the s corporation or perhaps they tax the s corporation and lastly why passive income such as buy and hold rental real estate should not be taxed as an s corporation so if this is your first time watching my name is navi mirage i'm a cpa who helps real estate professionals that's real estate agents and realtors and brokers across the country save thousands of dollars in taxes but um that said if you are a regular business owner and you don't deal with real estate stick around because this bus this video is going to apply to all small businesses um let me just lay that lay the foundation for you a moment uh we're talking about when the s corporation may not make financial sense right and so before watching this video some of you may want to brush up on the different differences between what a sole proprietor is an llc an s corp and a c corporation and i have another video on that topic so if you're not quite understanding what i mean by an s corp or how an llc is taxed as an s corp or a corporation a c corporation that is can be taxed as an s corporation you might want to watch those videos first and i'll link them either in the description or somewhere else depending on where you're watching this video as a refresher though from some of those videos and me diving deeper into the s corporation remember that the profit from your business is subject to two different types of tax right so the profit from your business is subject to self-employment taxes and it's subject to income taxes both both at the federal and state level okay self-employment taxes are another way of saying social security and medicare taxes okay the s corp strategy is all about saving money in self-employment taxes it doesn't have anything to do really with the federal income tax or the state income tax so whenever you hear s-corp understand that it's a strategy related to saving money in self-employment taxes and not so much federal income taxes or state income taxes recall that self-employment taxes are paid at a rate of 15.3 percent on the profit of your business so let's say you have a very profitable business that has a hundred thousand dollars in profit you're gonna pay self-employment taxes of fifteen thousand three hundred dollars if you're taxed as a sole proprietor and not taxed as an s corporation okay so now that you have that knowledge or that foundation let's talk about the reasons why you should not be taxed as an s corporation so i'm just going to hit the highlights here in this video uh my plan is to create subsequent videos that dive into these topics in greater detail so be sure to subscribe so you don't miss those videos because i think understanding the why is just as important of understanding these sort of statements that i'm making so how much profit should you be earning in your business before baking uh the s corp election and in my view sort of the general is 40 000 and i'm defining profit here as revenue minus your expenses right so some of you earn your revenue by selling products others of you earn revenue by selling services right so either way i'm defining as profit as the income that you earn the revenue that you earn minus all your tax deductible expenses so um the reason for the forty thousand dollar figure and why i think that's sort of the um generic amount of profit you should make before making the s corp election is because of the additional cost associated with an s corporation so you're going to have uh tax preparation fees because the s corporation is a separate tax return than that of an individual uh that's taxed as a sole proprietorship let me say that one more time or a little bit differently when you have an s corp you have to fill out or file a s-corporation tax return which is different than when you were perhaps an llc tax as a sole proprietor or perhaps you didn't form an llc and you're just tacked to the sole proprietor there's now two separate tax documents that need to be filed and so cpa is going to charge you money to do that for you right also when you're in s corp you're going to need to take a quote-unquote reasonable salary per the irs there's a lot of paperwork that has to deal with paying yourself and so you'll likely hire a payroll service to perform that for you and also there's the annual maintenance of an s corporation or perhaps the annual reporting of an llc that's taxed as an s corporation or the annual reporting of a c corporation that's then taxed as an s corporation all of these are fees involved in having an s corp right and so basically you know it's cost benefit analysis so you want to make sure that these fees don't outweigh your tax savings and i have found that it's usually around the 40 000 mark where it makes sense to make that s corp election but you know it's not a one-size-fits-all answer and you should consult with your cpa or perhaps myself to make sure that it's right for you the second reason why you may not want to be taxed as an s-corporation is when you have high w-2 wages so if you are an employee at a company and also have um a small business right so you you work state of nine to five and you also have a side hustle where you might sell on amazon or you sell real estate on the side if your rate if your wages already exceed what's called the wage base which in 2020 is currently 137 700 that means your income has already hit the cap for social security taxes so the s corp strategy is not going to save you any money as a matter of fact you'll actually lose money if you elect the s corporation status for that business because your s corp will pay for the employer portion of social security and medicare taxes unnecessarily because if you're taxed as a sole proprietor you wouldn't have any of those additional payroll costs associated with the s corp and i i get it that you may not understand the details of what i'm saying here the important thing to note is that if your salary is a you know 137 000 at your day job or higher and you're also have a side hustle you might not want to be an s corp okay um again the details will be discussed in another video um there's still an opportunity for the s corp to make sense when your base wages are that high but instead of

Thanks izdubenim your participation is very much appreciated
- Consuela Staudt

About the author

Consuela Staudt

I've studied sociology of autism at Smith College in Northampton and I am an expert in viticulture. I usually feel groggy. My previous job was petroleum engineer I held this position for 4 years, I love talking about inventing and needlework. Huge fan of Hugh Laurie I practice weightlifting and collect militaria.