THE LLC
For new and existing business owners the latest trend is to form a Limited Liability Company (LLC). Advertisers and promoters are calling it the magic bullet for protecting yourself and to have a tax advantage. The real news is that business owners in California are not so lucky when it comes to owning an LLC; the reason being is that Taxifornia charges tax for having the right to do business in the state. The tax is assessed on GROSS SALES/REVENUE (not net income) with a minimum tax of $800. This right to do business tax applies to foreign entities as well so you can’t get around the tax for example if you own a Nevada or Delaware LLC that does business in the state.
From a tax standpoint, a Single Member LLC (aka SMLLC), is taxed as a sole proprietorship on your individual tax returns for Federal Tax purposes, putting you on the very height of audit profile. Sole proprietors are one of the highest audited tax entities which the IRS aggressively targets.
So how do you save yourself from these complications as a Sole Proprietor/SMLLC and lower your audit exposure?
A reasonable fix for this conundrum is to have your LLC elect to be taxed and treated as an S Corporation. This election changes the reporting of your tax information so that now your business information is filed on an S Corporation Tax return for Fed and State and the net information flows through to your individual tax return thereby lowering your exposure as a sole proprietor. Taxifornia still has a minimum S Corporation Tax of $800 BUT the tax is based on NET income (as opposed to GROSS income as in an LLC).
Let me help you. Call me today to discuss how we can solve your LLC problem and help lower your audit risk. Anthony W, Imbimbo, CPA, 619-497-1040.
Look for part 2 coming soon describing the different entities you can choose as a business owner.