California Single-Member LLC (Pros & Cons Explained)
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.
- 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.
- In 2022, California's $1 billion economy is ranked 5th globally between Germany and the United Kingdom.
- 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.
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 staying small. You can do big things with a small team. - Jason Fried, CEO of Basecamp
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 .
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.
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.
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Does a California Single-Member LLC Need an EIN?
A California single-member LLC may need an EIN if the owner intends to open a business bank account or hire employees.
Does California Require Articles of Organization for Single-Member LLCs?
California requires Articles of Organization for single-member LLCs to be officially formed.
Does a Single-Member LLC in California Need a Registered Agent?
A single-member LLC in California needs to have a registered agent to ensure compliance with state business laws.