Limited Liability Company (LLC)
An LLC is a hybrid business entity that blends elements of partnership and corporate structures. 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, and profit or losses flow through to its members. Certain types of businesses that provide professional services requiring a state professional license, such as legal or medical may not form an LLC. For California income tax purposes, an LLC will be classified as a partnership if it has more than one owner and will be treated as a disregarded entity if it has only one member. However, an LLC is allowed to elect to be treated (taxed) as a corporation. To be taxed as a corporation, the LLC files an election on Federal Form 8832, Entity Classification Election, with the Internal Revenue Service. California conforms to the federal entity classification regulations commonly known as "check-the-box regulations" that allow an LLC to elect to be taxed as a corporation.
- Key Features
- Filing Guidelines
- Filing Requirements
- Estimated Payments
- Withholding on California Source Income
- An LLC is a hybrid business entity that can be treated as a partnership, but it has the limited liability protection under civil law.
- An LLC is formed by filing "articles of organization" with the California Secretary of State prior to conducting business. An out-of-state LLC that conducts business in California should register with the Secretary of State.
- Forming an LLC is simpler and faster than forming and maintaining a civil law corporation.
- 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.
- Its members typically manage an LLC, unless the members agree to have a manager handle the LLC’s business affairs.
- 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.
- If the LLC has more than one owner, it will be treated as a partnership (subject to Subchapter K), unless it elected to be treated as a corporation. The items of income, deductions, and credits flow through from the LLC to each member’s California Schedule K-1, Members’ Share of Income, Deductions, Credits, etc., and distributive shares of property, payroll, and sales. Each member is responsible for paying taxes on their distributive share. If the LLC has a single member, it will be treated as a disregarded entity, and it will be treated as a sole proprietorship or a division of its owner, unless it elects to be taxable as a corporation.
- A husband and wife owning an LLC may elect to be treated as a partnership or a disregarded entity.
- If the LLC elected to be taxed as a corporation, it is subject to corporation tax law and filing requirements.
- In general, all the owners (members) are shielded from individual liability for debts and obligations of the LLC.
- 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. Its members typically manage an LLC, 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 in compliance with Subchapter K. 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.
- LLC do not pay income tax but they are subject to the $800 annual tax and a fee. Refer to Filing Guidelines for more information.
Return Due Date Change
For tax years beginning on or after January 1, 2016, partnerships, LLCs treated as partnerships, and Single Member Limited Liability Companies (SMLLC) owned by pass-through entities (S corporations, partnerships, and LLCs treated as partnerships), the return due date is the 15th day of the third month after the close of the tax year. For all other SMLLCs, the return due date is the 15th day of the fourth month after the close of the tax year.
LLCs Treated As Partnerships
- All LLCs (not classified as a corporation) that are doing business in California, or file an article of organization or certificate of registration with the Secretary of State must file Form 568, Limited Liability Company Return of Income, pay the annual minimum franchise tax of $800, and LLC fee (if applicable).
- LLCs that have to file in California to report California source income but are not subject to the minimum franchise tax of $800 and the LLC fee (refer to above rules), must file Form 565, Partnership Return of Income, instead of Form 568, Limited Liability Company Return of Income.
- An LLC treated as a partnership provides each member with a California Schedule K-1 that states the member’s distributive share of the LLC’s items of income, deductions, credits, property, payroll and sales.
- An LLC treated as a partnership files 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 source. The LLC must complete Schedule T and pay the tax for every nonresident member who did not sign a FTB 3832.
LLCs Treated As Disregarded Entities
- If an individual wholly owns an LLC, it will be treated as a disregarded entity unless it elects to be treated as a corporation and all income and expenses of the LLC will be reported on the member’s tax return as a sole proprietorship, i.e. Schedule C business.
- If a corporation or other business entity wholly owns an LLC, it will be treated as a disregarded entity and all income and expenses of the LLC will be reported on the member’s tax return as a division of the company.
- All LLCs treated as disregarded entities are required to file Form 568, Side 1, Side 2, Side 6 (Schedule IW), and pay the annual tax and LLC fee (if applicable). If its only member is a nonresident and has not signed the Single Member LLC Information and Consent on bottom of Form 568 Side 1, consenting to California’s jurisdiction, then the LLC is required to complete Schedule T and pay the tax on behalf of its single owner.
- A Single Member LLC treated as a disregarded entity may also be required to file Schedule B and Schedule K if either of the following two items below are met:
- The income or loss amount reported on Schedule B, line 1 or line 3 through line 11, is $3 million or more.
- The total distributive income/payment items on Schedule K, line 21a, is greater than or equal to $3 million or less than or equal to $-3 million.
LLCs as Partnerships or Disregarded Entities
- California Form 568 or 565 must be filed by the 15th day of the 3rd month after the close of the LLC’s taxable year.
- The annual tax is due by the 15th day of the 3rd month of the taxable year, and is paid using Form 3522, Limited Liability Company Tax Voucher.
- The LLC must pay a fee if the California total income is equal to or greater than $250,000. The LLC must estimate the fee it will owe for the year and make an estimated fee payment. Refer to Estimated Payments below. Select the link on the last bullet for information on fee amounts and how total income is determined.
- All LLCs treated as partnerships and disregarded entities must complete Schedule EO, Pass-Through Entity Ownership (568), to report any ownership interest in other partnerships or limited liability companies regardless of whether these entities are required to file a tax return in California, or are subject to California annual tax or LLC fee.
- An LLC treated as a partnership, doing business or deriving income from within and outside of California will use Schedule R to determine their California source income.
- To determine if you are doing business in California and/or if your members are also considered doing business in California, refer to Doing Business Rules in California.
- More filing information for LLCs.
LLCs as Corporations
- All LLCs classified as corporations that organize, register, or doing business in California, or receive California source income must file Form 100, Corporation Franchise or Income Tax Return, or Form 100S, S Corporation Franchise or Income Tax Return.
- The Form 100 or Form 100S must be filed by the 15th day of the 3rd month after the close of the LLC’s taxable year. The LLC classified as a corporation is taxed at the corporation rate, and it is not subject to the fee or filing of the Schedule K-1, Schedule T, Schedule EO either. Also, follow C Corporation Filing Guidelines or S Corporation Filing Guidelines.
If the limited liability company is classified as a partnership or disregarded entity and files Form 568, the following estimated tax guidelines apply:
- Estimated LLC fee is due by the 15th day of the 6th month of the taxable year. LLC should use form FTB 3536, Estimated Fee for LLCs, to remit the estimated fee payment.
- 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, refer to FTB 1017, Resident and Nonresident Withholding Guidelines.
If the Limited Liability Company is classified as a corporation and files Form 100 or Form 100S, the following estimated tax guidelines apply.
- The estimated tax is payable in four installments.
- For calendar tax years, installments are due and payable on April 15, June 15, September 15, and December 15. For fiscal tax years, refer to When are my corporation’s estimate payments due?
- Corporations complete Form 100-ES to report their estimated taxes.
- Additionally, members may have to make estimated tax payments for their own reporting purposes.
- An LLC is considered a withholding agent if they control, receive, have custody of, dispose of, or pay California source income. Get
- A withholding agent is required to withhold from all payments or distributions of California source income made to a nonresident payee unless the withholding agent receives authorization from us for a waiver or a reduced withholding amount. Withholding is optional, at the discretion of the withholding agent, on the first $1500 in payments made during the calendar year.
- If a LLC is required to withhold and remit backup withholding to the Internal Revenue Service, they also are required to withhold and remit to Franchise Tax Board, except for instances that are specifically excluded for California purposes.
- The LLC may be required to withhold taxes if the LLC distributes California source taxable income to a nonresident member. For more information about withholding, refer to FTB 1017, Resident and Nonresident Withholding Guidelines.
- Withholding requirements for sale of California real estate.
Secretary of State’s (SOS) Statement of Information Penalty
The California Secretary of State imposes a penalty if your LLC fails to file its required Statement of Information. Go to Secretary of State’s (SOS) Statement of Information Penalty for more information.
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