Limited Liability Company (LLC)
An LLC is a newer form of business entity. It has advantages over corporations and partnerships. The LLC’s main advantage over a partnership is that, like the owners (shareholders) of a civil law corporation, the liability of the owners (members) of an LLC for debts and obligations of the LLC is limited to their financial investment. However, like a general partnership, members of an LLC have the right to participate in management of the LLC, unless the LLC’s articles of organization and operating agreement provide that the LLC is to be managed by managers.
For California income tax purposes, an LLC with more than one member will be classified as a partnership, and an LLC with a single individual member will be treated as a sole proprietorship, unless the LLC chooses to be classified as a corporation for income tax purposes. To be taxed as a corporation, the LLC files an election on a Form 8832, Entity Classification Election, with the Internal Revenue Service. California treats the LLC and its owners for income tax purposes in the same manner the LLC is treated for federal tax purposes.
- An LLC may have one or more owners, and may have different classes of owners. In addition, an LLC may be owned by any combination of individuals or business entities. An LLC that is taxable as a partnership can achieve both conduit tax treatment and limited liability protection under civil law, similar to an entity taxable as an S corporation. However, an LLC taxable as a partnership does not have the ownership restrictions that apply to entities taxable as S corporations.
- If the LLC has a single member, it will be disregarded as separate from its owner, and will be treated as a sole proprietorship or a division of its owner, unless it elects to be taxable as a corporation.
- In general, all the owners (members) are shielded from individual liability for debts and obligations of the LLC.
- An LLC is formed by filing "articles of organization" with the California Secretary of State prior to conducting business.
- Forming an LLC is simpler and faster than forming and maintaining a civil law corporation.
- LLCs do not issue stock and are not required to hold annual meetings or keep written minutes, which a corporation must do in order to preserve the liability shield for its owners.
- Either before or after filing its articles of organization, the LLC members must enter into a verbal or written operating agreement. A formal, written agreement is advisable.
- An LLC is typically managed by its members, unless the members agree to have a manager handle the LLC’s business affairs.
- Generally, members of an LLC that are taxed as a partnership may agree to share the profits and losses in any manner. Members of an LLC classified as a corporation receive profits and losses in the same manner as shareholders of a corporation legally organized as such.
- An LLC’s life is perpetual in nature. However, the members may agree to a date or event of termination.
- All LLCs classified as corporations that organize in California, register in California, conduct business in California, or receive California source income, must file California Form 100. The California Form 100 must be filed by the 15th day of the 3rd month after the close of the LLC’s taxable year.
- The LLC will be taxed at the corporate tax rate of 8.84 percent and will be subject to a minimum tax of $800.
- All LLCs classified as partnerships or disregarded entities that organize in California, register in California, or conduct business in California, must file California Form 568 Limited Liability Company Return of Income. California Form 568 must be filed by the 15th day of the 4th month after the close of the LLC’s taxable year.
- An LLC required to file Form 568 pays an annual tax of $800, and may be subject to an LLC fee based on total income from all sources derived from or attributable to the state of California. The annual tax is due by the 15th day of the 4th month of the taxable year, and is paid using CA Form 3522, Limited Liability Company Tax Voucher.
- In addition, an LLC filing Form 568 which has members who are not residents of California must file FTB 3832, Limited Liability Company Nonresident Members' Consent with Form 568. FTB 3832 is signed by the nonresident individuals and foreign entity members to show their consent to California’s jurisdiction to tax their distributive share of income attributable to California sources. The LLC must pay the tax for every nonresident member who did not sign a FTB 3832.
- More filing information for LLCs.
If the Limited Liability Company is classified as a corporation and files California Form 100, the following estimated tax guidelines apply.
- The estimated tax is payable in four installments.
- Installments are due and payable on April 15, June 15, September 15, and December 15.
- Corporations complete Form 100-ES to report their estimated taxes.
- Additionally, members may have to make estimated tax payments for their own reporting purposes.
If the Limited Liability Company is classified as a partnership or disregarded entity and files California Form 568, the following estimated tax guidelines apply:
- Estimated LLC fee is due by the 15th day of the 6th month.
- Members may have to make estimated tax payments for their own reporting purposes.
The LLC treated as a partnership may be required to withhold taxes if the partnership distributes California source taxable income to a nonresident member. For more information about partnership withholding, see FTB 1017.