Due to its flexibility and ease of formation, the limited liability company (LLC) has gained popularity. However, despite being convenient, like any other business LLCs must also file various tax returns. The Internal Revenue Service (IRS) states that an LLC “may be classified for federal income tax purposes as a partnership, corporation, or an entity disregarded as separate from its owner” – but what does this mean for business owners? And what are the tax filing requirements for an LLC in California? Our Sacramento tax preparers address these questions below.
What is a Limited Liability Company (LLC)?
According to the IRS, an LLC is a business structure allowed by state statute. It blends different elements found in business structures such as partnerships and corporations. Besides generally being simple to form, LLCs can provide different benefits for members.
According to California’s Franchise Tax Board (FTB), “The LLC’s main advantage over a partnership is that… the liability of the owners (members)… for debts and obligations of the LLC is limited to their financial investment. However… members of an LLC have the right to participate in the management of the LLC, and profit[s]… flow through to its members.” These features make this business structure very attractive to many entrepreneurs.
By creating an LLC, the owners, or members of the business, are generally not liable for the debts and obligations of the LLC. Therefore, creditors cannot go after a member’s personal assets, such as their household or banking accounts.
The rules regarding the formation and development of an LLC can change depending on the state in which it is established. In the state of California, there are specific guidelines set to create limited liability companies. To form an LLC in California, interested individuals must do the following:
- Select a name for the LLC.
- Select a Registered Agent (known in California as an “Agent of Service of Process”).
- File the LLC’s Articles of Organization, either online or via mail.
- File a document called an “initial Statement of Information” (Form LLC-12).
- Establish a formal operating agreement for the LLC.
- Last but not least, obtain a unique Employer Identification Number (EIN) for the LLC.
What Tax Forms Must an LLC File in California?
For federal income tax purposes, an LLC may be classified as a partnership, corporation, or “disregarded entity.” For income tax purposes in California, an LLC can likewise be classified either as a partnership or a “disregarded entity.” Alternately, they have the right to be taxed as corporations. These classifications impact the tax treatment of LLCs.
LLCs Classified as Partnerships
The FTB sets forth the following requirements for LLCs that are classified as partnerships. Note that this is not an exhaustive list. LLCs that are classified as partnerships in California must generally:
- File Form 568 (Limited Liability Return of Income)
- Pay a yearly minimum franchise tax ($800)
- Pay an LLC fee, depending on the circumstances
- Provide members with California Schedule K-1 (Member’s Share of Income, Deductions, Credits, etc.)
LLCs Classified as Disregarded Entities
Tax requirements for LLCs that are treated as disregarded entities generally include, but are not limited to, the following in California:
- Filing Form 568, including Sides 1, 2, and 6
- Filing Schedules B and K, depending on income and losses
- Paying a yearly LLC fee, if applicable
LLCs Classified as Corporations
If an LLC is classified as a corporation, it is necessary to file either Form 100 (California Corporation Franchise or Income Tax Return) or, alternately, Form 100S (California S Corporation Franchise or Income Tax Return). Note that failure to file the appropriate tax forms for your LLC can result in costly fines and penalties.
Business Tax Accountants Serving Sacramento and Roseville, CA
The lists above illustrate just a few of the complex tax requirements LLCs need to follow in California. Navigating this process can be challenging, which is why it is in your best interests to retain the services of a professional small business accountant who can evaluate your compliance with local, state, and federal regulations.
The best way to make sure your LLC avoids unnecessary penalties is to file your tax returns on time. It also requires close and careful attention to detail. That is why over the years we have fine-tuned our skills and knowledge on income tax return for LLCs and corporations. The knowledgeable accountants at Cook CPA Group can help you understand and work through the tax filing requirements for your LLC. Let our experience and knowledge work for you. To learn more about your options in a free consultation with one of our Sacramento tax accountants, call Cook CPA Group at (916) 910-0323 today, or contact us online.