The LLC is one of the most popular business entities for small businesses in California.
It is called a "hybrid entity" because it combines some of the features of corporations and partnerships.
Among these are pass-through taxation, limited liability for its owners (called "LLC members"), and flexible management structures (unlike corporations).
One other thing that makes the LLC attractive to many entrepreneurs is that there's no limit on how many members can be in an LLC - it can either be just one member or dozens.
This article will focus only on what a single-member LLC in California entails and how to know if it's right for you.
The Advantages of California Single-Member LLCs
A single-member LLC is a business entity that allows you to operate as your own 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.
You can form this type of company in California, and it has some benefits and drawbacks compared to other types like corporations or partnerships.
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 taxes.
The Disadvantages of California Single-Member LLCs
Strictly speaking, 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 in CA 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.
The owner of the LLC needs to be considered an employee of the LLC and pay self-employment taxes on earnings from the 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 or will be paying wages
- If your company does business in other states, you will need to get a certificate of authority from the 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.
Every LLC that sells goods or services in California has to pay sales and use taxes.
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.
Does a Single-Member LLC Need an Operating Agreement in California?
The California Secretary of State doesn't require the LLC operating agreement, but it's recommended for your own protection.
Even if you are the only member of your LLC, it is important to have an LLC agreement that can help to avoid liability.
Your operating agreement will specify the daily operations of your LLC, including whether it's member-managed or manager-managed, how you hire employees, perform business transactions, etc.
Do You Have to Pay the $800 California LLC Fee the First Year?
You do not have to pay the $800 California LLC fee 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 Secretary of State.
How Do I Extend a Single-Member LLC in California?
The State of California does not require separate federal extensions for single-member limited liability companies (SMLLCs), but you will still need to file a California LLC tax return.
The due date for the state tax return would be the same as the federal deadline unless you received an extension on your federal filing.
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.
However, if you have employees, you will need to get an EIN for your LLC.
Can a Corporation Own an LLC in California?
Yes, a corporation can own an LLC in California. The corporation and the LLC will have to follow the same rules and regulations that are set forth by the State of California.
This includes filing the necessary paperwork with the State and paying any associated fees.
Additionally, both entities must keep accurate records of their business dealings and maintain good communication with each other.
Does California Require Articles of Organization?
Yes, California does require Articles of Organization for the organization for both single-member and multi-member LLCs to be officially formed.
You have to file Articles of Organization with the State's office in order to create a limited liability company (LLC) in California. There is a filing fee of $70.
Is the California LLC Fee Based on Gross Receipts?
No. All LLCs in Califonia have to pay the annual $800 fee, even if they don't generate revenue.
The company's gross revenues determine gross receipts tax, which is prorated based on the generated revenue.
LLCs that earn $250,000-$499,999 pay a a $900 fee, those that earn $500,000-$999,999 pay a $2,500 fee, $1,000,000-$4,999,999 pay $6,000 and those that generate at least $5 million or more pay a $11,790 fee.
Does a Single-Member LLC Need a Registered Agent?
Yes, a single-member LLC needs to have a registered agent, just like any other business entity.
An LLC member (or owner in this case) can act as their own registered agent, but keep in mind that this role can be demanding and time-consuming and may not be the best option for everyone.
Single Member LLC California: Conclusion
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.
A lawyer will be able to tell you if forming an LLP might make more sense for your business and what that would entail.
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.
Take some time to explore different types of entities so that when it's time to register one, you know exactly how this process works and are fully informed about the pros and cons of each type of company.