California LLC Fee: Everything You Need to Know
California LLC fee and tax are determined at the state level based on the state’s tax schedule.5 min read
2. How Much Is California's Corporate Tax?
3. California Incorporation Fees
4. California LLC Fees and Taxes
5. Is the California LLC Tax ($800) and/or LLC Fee ($900+) Deductible on Personal Return (SMLLC disregarded)?
6. Tax on Gross Receipts
7. Self-Employment Tax
8. Higher Income Tax
California LLC fee and tax are determined at the state level based on the state's tax schedule. The total amount of California taxes an LLC will need to pay is the amount of taxes plus the number of fees. If an LLC is earning less than $250,000 per fiscal year, the LLC would be required to pay $800 in taxes, with no LLC fee.
If an LLC is earning between $250,000 and $499,999 per year, the tax is $800 and the fee is $900. The LLC would thus be required to pay $1,700. If an LLC is earning between $500,000 and $999,999 per year, the LLC would be required to pay $800 in taxes and $2,500 in fees, paying a total of $3,300. If an LLC is making anywhere between 1 million dollars and $4,999,999 per year, the tax is still $800, but the fee will be $6,000. For any LLC earning anything above 5 million dollars per year, the tax is still $800, but the fee will now be $11,790. The LLC tax accumulates each year until the LLC is dissolved. These fees are in addition to any U.S. federal income taxes.
There is also an annual franchise tax of $800 that an LLC will have to pay if they are registered to conduct business in California. This fee will apply to all California businesses, as well as foreign businesses, and applies even if the LLC doesn't do business or operates at a loss. An LLC will also have to pay the full $800 even if it registers in the middle of the year. However, there are a few exceptions to this rule:
- If no business is being done during certain short periods of time
- Nonprofit organizations
- LLCs owned solely by members of the Army that are deployed
- S corporations
Do You Have to Pay the $800 California LLC Fee the First Year?
Any and all limited liability companies that aren't classified as corporations and conduct business in the state of California, or those that have filed an Article of Organization or Certificate of Registration with the secretary of state must file a Form 568, Limited Liability Company Return of Income, pay the annual minimum franchise tax of $800, and LLC fee (if applicable).
Limited liability companies that are required to file in California to report California-source income, but aren't subject to the minimum $800 franchise tax and the LLC fees, will need to file a Form 565, Partnership Return of Income, rather than Form 568, Limited Liability Company Return of Income.
The $800 minimum tax prepayment is due by the 15th day of the fourth month after LLC formation.
How Much Is California's Corporate Tax?
The corporate tax rate in California is 8.84 percent. This rate is comparable to many other states. There are many exemptions to this tax, as well as deductions and other approaches to reduce the tax fee.
California Incorporation Fees
California imposes fees when a business is looking to incorporate in California because of the various stages of the process. For example, California will impose a fee for when a corporation registers its name. This fee is determined based on location. There is also a filing fee of $100.
Once incorporated, a business must file a detailed report about the corporation and will incur a fee of $25-$75. This report needs to be filed annually, along with a service charge of $25. In addition, if your business needs a specific license, it will also be charged a fee. For example, most municipalities will charge anywhere between $50 to $100 for a small business license.
California LLC Fees and Taxes
Forming an LLC in California will be cheaper than filing as a corporation. It costs about $85. However, there is also a $20 charge to the corporation when it files a Statement of Information. Having an LLC also requires ongoing fees. There is a yearly $800 fee which is due three months after the LLC is created and every April 15 afterward.
Is the California LLC Tax ($800) and/or LLC Fee ($900+) Deductible on Personal Return (SMLLC disregarded)?
According to information available on the Internal Revenue Service's website, the answer is yes.
You are able to deduct a number of local, state, foreign, and federal taxes that can be directly attributed to your business as business-related expenses. According to information provided by the California Tax Service Center, annual taxes are not considered to be deductible, but generally speaking, these limited liability fees are considered to be deductible as necessary and ordinary business expenses.
Tax on Gross Receipts
California also imposes a "Gross Receipts Tax" on LLCs operating in the state, but not on corporations. Like most other forms of businesses, a California corporation only pays tax on net taxable income. In the state of California, the taxes a corporation are expected to pay are based on the company's net revenues. A limited liability company, however, will see their tax rates based on gross revenue.
Because most companies will need to bring in a minimum of $250,000 in terms of gross receipts to just break even, California LLCs are required to pay higher franchise taxes than corporations, even if they are operating at significant financial losses. In comparison, corporations in the state of California are not subject to these gross receipt taxes. Like many other business types, such as trusts, partnerships, and sole proprietorships, corporations in California are only required to pay taxes on their net taxable income.
The exception to this is the state minimum of $800 in franchise taxes that are then applied to the total of taxes the company owes.
Another reason to consider avoiding the formation of an LLC in California is the fact that each member will be expected to pay higher self-employment taxes. In California, limited liability companies are treated as either disregarded entities, such as a sole proprietorship, when it has only one member, or a partnership if it has more than one member unless it specifically elects to be treated in a different way.
Net income generated by the LLC is treated as self-employment income and taxed at around 15 percent. In comparison, a corporation's shareholders are not subject to self-employment taxes. Rather, they pay only a 15 percent capital gains tax on any applicable profit distributions.
S corporations in California are only required to pay 7.65 percent in employment taxes on their employees' and officers' declared salaries. Normally, S corporations in California provide their shareholders and employees with reasonable salaries that employment taxes are paid on. This is in addition to the balance on profits via dividends and isn't subject to payroll and income taxes. Instead, S corporations pay only the 15 percent capital gains tax rate.
Higher Income Tax
There is also a good chance that LLC members will be required to pay income taxes on money they haven't actually received as payment for their services. If the limited liability company, for example, uses profits to acquire assets or build up its inventory, its members may be required to pay self-employment tax on the value of these things even though they never received any of the money for themselves.
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