A limited liability company is one of the most popular business entities for small businesses in California.
I'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.
I have tried and tested many different approaches to creating a strong LLC because I have vast knowledge and expertise in creating single-member LLCs.
We have performed a months-long study and shared our knowledge with legal advisers and attorneys with more than 10 years of experience in the industry to assist you understand the benefits and drawbacks of managing a single-member LLC.
Quick Summary
- The main benefit of a California single-member LLC is that you can run the business on your terms and be the sole member.
- The largest drawback of operating a single-member LLC in California is the hefty franchise tax, which can be as high as $800.
- In California, a limited liability company with a single owner is viewed as a disregarded business, providing practically total liability protection to the LLC owner.
The Advantages of California Single-Member LLCs
The biggest advantage of a California single-member LLC is that it allows you to operate as your boss and be the only member of the company.
It is what we call a "disregarded" entity for federal tax purposes. A single-member LLC is a business entity that includes just one person with a registered agent.
One of the key advantages of single-member LLCs is that they offer limited liability protection to their owners.
This means that the owner's personal assets are protected from any debts or liabilities incurred by the LLC.
In California, single-member LLCs are taxed as disregarded entities, which means that the profits and losses of the LLC flow through to the owner and are reported on their individual tax return.
A single-member LLC owner is also allowed to take advantage of some tax deductions and credits that are not available to owners of other types of businesses.
For example, the owner can deduct business expenses from their income, and they may be able to claim the small business deduction on their California LLC taxes.
The Disadvantages of California Single-Member LLCs
The biggest disadvantage of this formation is that the owner of an SMLLC is a sole proprietor for federal income tax purposes.
However, unlike sole proprietorships, SMLLCs can choose their tax method (S or C corporation).
This freedom comes with some strings attached.
The SMLLC owner pays self-employment tax on their distributive share of the LLC's income. If you have an S corporation, you do not pay employment taxes on your salary (but instead pay yourself dividends).
You can avoid this by making a qualified retirement plan contribution out of the company earnings.
Keep in mind that C corporations are subject to double taxation: once at the corporate level and again when dividends are paid to shareholders.
SMLLCs protect their owners from personal liability in case the company gets sued.
However, the risk of LLCs piercing the corporate veil is high with SMLLCs because it's difficult to separate the business owner from the entity, especially if they use their personal bank account for business purposes.
In that case, the owner can be held personally responsible for the LLC's debts.
California Single-Member LLC Taxes
A limited liability company with one owner in California is considered a disregarded entity and gives the LLC owner (sole owner) almost complete liability protection.
Unlike a multi-member LLC, which is taxed as a partnership by default, the default tax status of single-member LLCs is that of a sole proprietorship.
Thus, the single-member LLC is taxed as a sole proprietorship.
According to California Franchise Tax Board, single-member limited liability companies do not pay taxes at the state level; instead, they will be taxed as part of their owners' personal income tax returns.
Single-member LLCs need to pay self-employment taxes, even when employing a registered agent [1].
The owner of the LLC needs to be considered an employee of the LLC and pay self-employment taxes on earnings from the limited liability company.
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.
Each year, every LLC in California has to pay the $800 Franchise Tax (annual tax) to the Franchise Tax Board.
How much you earn in sales will dictate the amount of your yearly tax.
If your LLC makes more than $250,000, the Franchise Tax is even higher. The highest tax you can pay is $11,790, which is set for SMLLCs with income over $5,000,000.
The value of the taxable items sold by your SMLLC is reported on sales and use tax returns in the same way that it is for other businesses.
The sales tax rate is 7.25% and is payable annually, quarterly, and monthly, depending on how much revenue you generate in sales.
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FAQs
Does a Single-Member LLC Need an Operating Agreement in California?
A single-member LLC in California doesn't need the LLC operating agreement, but it's recommended for your protection.
Do You Have to Pay the $800 California LLC Fee the First Year?
You do not have to pay the $800 California LLC fee for the first year (initial statement).
However, there is a $20 annual filing fee for each calendar taxable year (biennial statement) every LLC needs to file with the California Secretary of State.
How Do I Extend a Single-Member LLC in California?
To extend a single-member LLC in California you don't need separate federal extensions for single-member limited liability companies (SMLLCs). However, you will need to file a California LLC tax return.
Does a California Single-Member LLC Need an EIN?
If you are a sole member of your LLC and don't have employees, you don't need an EIN.
Your Social Security Number or your Taxpayer Identification Number will suffice.
Does California Require Articles of Organization for Single-Member LLCs?
California requires Articles of Organization for single-member LLCs to be officially formed.
Is the California LLC Fee Based on Gross Receipts?
California LLC fee is not based on gross receipts, but all California-based LLCs must pay the annual $800 fee, even if they don't generate revenue.
Does a Single-Member LLC in California Need a Registered Agent?
A single-member LLC in California needs to have a registered agent, just like any other business entity.
Can a Non-resident Form a California Single-Member LLC?
A non-resident can form a California single-member LLC. This state allows anyone regardless of residency, to establish an LLC.
Single Member LLC California: It Is Worth It
If you want to form a single-member LLC in California, consider your options before making the final call. Seek legal advice from a professional, like a registered agent service.
You may also want to consult with someone who specializes in tax law, accounting services, or companies that offer LLC formation services; they can help you figure out which entity is best suited for your needs based on where all of your income comes from.
References:
- https://www.irs.gov/businesses/small-businesses-self-employed/single-member-limited-liability-companies
