California Single-Member LLC (Pros & Cons Explained)

Published by Delina Chantel Yasmeh | Author

Last updated: September 17, 2024

FACT CHECKED by Lou Viveros, Growth & Transition Advisor

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If you intend to form a single-member LLC, you should consider that the state of California has the nation's largest economy and diverse business opportunities and is home to 12% of the total population in the U.S.

As a Mergers and Acquisitions specialist and Master's Degree holder in tax law, entrepreneurs seek my expertise on forming limited liability companies and joint organizations across all states.

Together with our team of legal professionals, we've put together a detailed guide to help you understand the ins and outs of creating a California Single-Member LLC, including both advantages and disadvantages.

Quick Summary

• A single-member LLC in California will benefit from personal asset protection, pass-through taxation, tax flexibility as well as the profitable business climate of the state.
• The largest drawback of operating a single-member LLC in California is the hefty $800 franchise tax, and additional LLC fees on high income brackets.
• According to Business Initiative, 10.34% of businesses in the United States are sole proprietorships.
• According to businesses I work with, the most profitable industries in California are agriculture, film production, and travel and tourism.

The Advantages of California Single-Member LLCs

Forming a single-member LLC in California gives you the opportunity to grow your business in a world-ranked economy while enjoying the benefits of a limited liability company.

1. Personal Asset Protection

Since a limited liability company is regarded as a separate entity from its owner, personal assets are protected from any legal action taken against the business entity. Only your LLC's assets could be used to settle debts and obligations, debtors may not pursue any personal property.

While this is true, I encourage my clients to open a separate business bank account to clearly put a distinction between personal assets and company finances, and avoid piercing the LLC's corporate veil.

2. Pass-through Taxation

The business itself is not subject to taxation since the IRS considers a single-member LLC as a disregarded entity, taxable income is passed-through to the owner's personal return. Unlike corporations, liability companies are not subject to double taxation.

According to the Internal Revenue Service (IRS), there was a 1.9% increase in sole proprietors filing returns in 2020.

3. Tax Classification Options

By default, single-member LLCs are taxed as a sole proprietorship, all business income is reported and paid as self-employment tax.

However, I inform my clients that they can opt to change their California LLC's tax status to a corporation, S corp or C corp. This will give you an option to pay yourself a salary, and be taxed based on the compensation only, and not on the total income.

“There’s nothing wrong with having a small business. Great things can be accomplished with humble beginnings.”

- Jon Morgan, CEO & Editor-in-Chief of Venture Smarter

The Disadvantages of California Single-Member LLCs

Single-member LLCs in general may be subject to some disadvantages due to the nature of California business laws.

1. Franchise Tax

In my experience of forming LLCs across the states, California has one of the highest annual franchise taxes collected from LLCs compared to other states.

Every limited liability company, including single-member LLCs, pay an annual tax of $800, even if they are not conducting business.

The initial payment is due on the 15th day of the 4th month after your LLC filed with the Secretary of State. To illustrate, if you form a new LLC and register with the SOS on July 20, your tax is due on October 15 of that year. Subsequent annual tax payments are due on April 15 of your taxable year [1].

2. LLC Fee

The income generated by your LLC is estimated, and you have to pay a fee of $900, if the amount exceeds $250,000. The price range for the LLC fee is between $900 and $11,790.

The LLC owner must estimate and pay the fee by the 15th day of the 6th month, of the current tax year. Late payments are subject to penalties with interest, that's why I always ensure to file the required fees on time.

3. Membership

Unlike multiple-member companies, a single-member LLC has to be restructured and converted into a new business entity to acquire partners. Changing the organizational structure of your single-member LLC entails additional paperwork and fees to enact the transition legally.

Other Considerations for your California LLC

There are a few other things to keep in mind when it comes to California single-member LLCs:

• You may need an EIN (Employer Identification Number) if you have employees (such as a registered agent) or will be paying wages
• If your company does business in other states, you will need to get a certificate of authority from the California Secretary of State
• You may also want to file for a fictitious business name in your county.

Related Articles:

• Removing a Member From an LLC in California
• How Much Does It Cost To Start An LLC In California
• Best LLC Formation Services in California

FAQs

References:

1. https://www.ftb.ca.gov/file/business/types/limited-liability-company/index.html