California Limited Liability Business– An Introduction
Many individuals are shocked to learn that the LLC company entity is a relatively current phenomenon. Wyoming was the first state to enact laws the creation of LLCs in 1977. The majority of states didn’t get on the LLC bandwagon up until 1988 when the Internal Revenue Service categorized the LLC as a pass through entity for tax functions. This judgment turned LLCs into the popular beast they are today. Now every state has legislation permitting the development of LLCs and California is no different.
What Are The Advantages To Forming A LLC?
The LLC company entity offers numerous benefits to small businesses. An LLC is going to offer a guard in between your business activities and personal possessions similar to a corporation. Unlike a corporation, there are far less corporate rules. Instead of setting up payroll, you can take draws from the entity. You are not required to preserve a balance sheet, although this is recommended. Simply put, the LLC entity is all about versatility.
Should I Form A California LLC For My Business?
Perhaps. While LLCs provide substantial flexibility to small companies, California charges an LLC tax that can really cramp your profits. This tax is charged on your gross profits for the “benefit of doing business in California” as an LLC. Lucky you. Depending upon your situation, forming an “S” corporation may be a much better choice in California.
Additional Tax Issues
California enables an individual to possess an LLC. This triggers problems from a tax point of view. The IRS doesn’t truly acknowledge the presence of LLCs possessed by someone. The IRS takes the position that you have to have 2 individuals to be taxes as a collaboration. Appropriately, it treats single owner LLCs as sole proprietorships. The issue with this outcome is that you wind up paying self-employment taxes.
While LLC structures provide substantial versatility, the structure is not always the best option for a small company. Make sure you consult with proficient tax counsel prior to forming an LLC for your company.