California LLC Compliance Calendar
A California LLC compliance calendar is used to meet important deadlines related to establishing and maintaining LLC status.3 min read
2. Tax Implications on LLC's
3. Legal Implications Related to Non-Compliance
A California LLC compliance calendar is used to meet important deadlines related to establishing and maintaining LLC status. LLCs or Limited Liability Companies are popular due to their ability to avoid double taxation and the benefits of limited liability for the LLC members.
Steps in Forming a California LLC
There are numerous steps to follow when forming a California LLC. Each should be followed as accurately as possible to avoid a rejection from the California secretary of state.
- A name must be chosen that is not taken by another entity. In California, the secretary of state website allows for name searches on the business search page. This step can also be completed by calling or writing to the secretary of state. A name can be reserved as well. If a name is already taken, the articles of organization will be rejected.
- If your services are deemed professional and require a license, certification, or registration, an LLC will not be able to be formed. To determine if your profession is restricted, refer to the profession's licensing authority.
- The articles of organization must be filed with the California secretary of state. This can be done via mail or in-person. Depending on the time of year, the process will take approximately seven to 10 days. An expedited filing is possible for an additional fee. Once filed, the LLC is required to pay an annual minimum tax fee of $800 with the California franchise tax board.
- All LLCs are required to obtain an Employee Identification Number or EIN. The EIN is used as identification of the business for all tax needs.
- The LLC should draft an operating agreement. This agreement states how the LLC should be managed and operated and lists the officers and ownership interests. This is not required by the state of California but is recommended. The operating agreement does not have to be filed with the secretary of state.
- California requires a statement of information be filed within 90 days and then biennially after the filing of the articles of organization with the secretary of state.
Tax Implications on LLC's
When forming a business, the tax implications should be reviewed prior to selecting the type of business. The California franchise tax board reported a total annual revenue of $610 million in the 2010-2011 fiscal year and more than $750 million in the 2014-2015 fiscal year.
For LLCs, a minimum franchise tax is required annually. This is also required for S corporations, limited partnerships, and corporations. California also imposes extra fees on LLCs based on the entity's total taxable income each year as stated in California revenue and taxation code § 17942(a).
LLCs with one member don't typically report income separately from their owner, but they are still required to pay the California franchise tax fee minimum. They must also pay an LLC fee annually and file a tax return with California annually as stated in the California tax filing guidelines.
For disregarded entities and LLCs that are classified as partnerships, there is a fixed-dollar fee imposed on any income from California sources. This fee can range from $900 for companies with income between $250,000 and $500,000 up to a maximum fee of $11,790 for companies with California-source income over $5 million.
Legal Implications Related to Non-Compliance
Following the procedures of the California franchise tax board is recommended to avoid costly legal action. In the case of Bay Area Gun Vault, LLC in 2010, it was discovered that one member of the two-person LLC was embezzling money. In an attempt to separate from the embezzling member, the other member first filed a tax return and paid the franchise fees as a two-member LLC and then attempted to file again for the remainder of the year as a single-member LLC. In the second filing, they paid a lower amount for the expected franchise fee, claiming they had paid the remainder of the fee earlier in the year under the two-member LLC.
However, the California franchise tax board determined that the entity was technically terminated when the other member was removed. This is part of California tax law § 17851, which states that if more than 50 percent of the interests of the LLC change hands, the entity is terminated. This meant that both the two-member entity and the one-member entity were required to pay all associated taxes and fees.
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