1. California Gross Receipts Tax
2. Single-Member LLC in California

LLC gross receipts tax is the gross income of the limited liability company. Before choosing to form an LLC, you should first be mindful of the benefits and drawbacks of the LLC, particularly in terms of the tax structure.

Generally, the Internal Revenue Service (IRS) disregards the LLC as a taxable entity. For that reason, the LLC must choose to be taxed as another type of business. For example, the LLC can choose to be taxed as a sole proprietorship (for single-member LLCs), a partnership, or a corporation.

Even though the LLC will be taxed as a different business, the company will still enjoy the many benefits of operating an LLC, which include limited liability protection, pass-through taxation (unless the LLC elects to be taxed as a C corporation), and greater flexibility in the management structure.

California Gross Receipts Tax

In 2010, the State of California created a new tax fee, referred to as the gross receipts tax, based on the LLC’s total income in the state.

In addition to a yearly $800 minimum franchise tax fee that is required of all California corporations or limited liability companies, there is also a gross receipts tax that is charged on every California LLC. Note that this tax is not imposed on the California corporation.

For the $800 minimum franchise tax fee, the entire amount is due, even if you form your business in the later part of the year. Therefore, it is not prorated. An exception does apply – and that is for businesses that have formed exceptionally late in the year (i.e. December), companies with no business activity in the State of California, nonprofit corporations with tax exemptions, some LLCs owned by developed members of the U.S. Armed Forces, and LLCs electing S corporation taxation.

The new gross receipts tax is clearly identified based on the company’s gross revenues. The Tax Resolution Institute believes as though the additional fee will further hinder the productivity and profitability of those people working in the state.

California LLCs are taxed at the state level in accordance with the California LLC Tax Schedule, which is based on gross revenue:

  • $0-$249,999:$0
  • $250,000-$499,999: $900
  • $500,000-$999,999: $2,500
  • $1mill-$4,999,999: $6,000
  • $5mill and up: $11,790

Since most companies have to generate more than $250,000 in gross receipts to break even with what you had at the beginning of the taxable year, a California LLC will be required to pay a greater franchise tax than a California corporation.

In California, the S corp is taxed at a rate of 1.5% tax of the net income earned, whereas the LLC is taxed based on such above-mentioned gross receipts. This is the main reason why the LLC is taxed higher than the corporation.

For example, assume that you own a company with gross receipts in the amount of $2 million and profits of $100,000 for 2014. If you operate as an S corp, you must pay 1.5% of the $100,000 profit in taxes, which results in $1,500. However, if you operate as an LLC, then you must pay taxes of $6,000 based on the fact that you fall within the $1 million-$4,999,999 tax scale.

Single-Member LLC in California

If you operate as a single-member LLC in the State of California, then you will be considered a disregarded entity for both federal and state tax purposes. Therefore, you will need to report all profits and losses on your personal tax return (Schedule C of Form 1040).

However, if you operate a single-member LLC and pay sales taxes to California for your company sales, then you must file a business tax return, which is referred to as Form 568.

If you failed to pay taxes in the prior taxable year after you’ve paid sales tax, then you will be provided with a questionnaire about the work you or your employees did for the business as well as requests for detailed inventory, equipment, where your business does business, and where you hold your products (i.e. warehouse or storage center). Thereafter, California will probably determine that you must file Form 568. If this is the case, you’ll want to be sure to file this form every year thereafter to prevent additional penalties.

If you need help learning more about the LLC tax structure in the State of California, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5-percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law, and average 14 years of legal experience, including work with, or on behalf of companies like Google, Menlo Ventures, and Airbnb.