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Tax Advantages - Limited Liability CompanyThe tax advantages of a limited liability company are often touted as a great benefit. In California, however, the picture is much more murky than it seems. The limited liability company has long been touted as the answer to every problem a small business faces. The limited liability company slices, dices and will tune up your car! Okay, that is getting a bit carried away, but it is an accurate portrayal of how the entity is built up in some media and do it yourself books. There are definite advantages to a limited liability company, but many attorneys including myself consider it a bit of a trap for the unwary. Let's take a look. Let's start with the basic tax advantage. The modern LLC will give you the asset protection of a corporation, but the tax situation of a general partnership. What this essentially means is you can avoid the double taxation that occurs with the C-corporation which is taxed on its revenues and then again when it distributes money to shareholders. With the LLC, the money is only taxed when distributed to the owners. Well, that's the story at least. In California, the tax advantages of a limited liability company really don't exist. While you can escape the double taxation of a C-corporation, you are going to get blindsided with so many other fees that it really will feel like you've fallen into a trap. Let's take a look. The Gross Revenue Trap...err Tax To say the California is a hostile place for small business is a minor understatement. If it wasn't such a great place to live, there wouldn't be a single business in the joint. The Gross Revenue Tax on LLCs is a perfect example. The tax starts kicking in at $250,00 in gross revenue. Once you hit that point, you must pay an additional $900 tax. If you make $500,001, the number jumps up to $2,500. This procession keeps occurring as your revenues increase. Now you might be thinking that a $900 tax at $250,000 isn't to bad. Well, look again. This is a GROSS revenues figure. This means you pay the tax before claiming any deductions at all. Let's say you have a bad business year. You bring in $550,000, but payout $600,000. Not only have you lost $50,000 for the year, but you are going to have to pay a gross revenue tax of $2,500 as well. Welcome to California! Single Member LLC Then there is a country wide snafu with single member LLCs. They are, again, touted as the greatest possible thing for single owner businesses. Ah, don't you love gurus giving bad advice? I've seen these fools on business shows saying this and I just laugh. Why? Well, the single member LLC provides you with no tax advantages at all. NONE! Why? Because the IRS does not even acknowledge its existence as a business entity. Instead, it calls it a "disregarded entity" for tax purposes. This means that the single owner must file his or her taxes as a sole proprietor and pay the dreaded 15.3 percent self-employment tax. What a nightmare. There were a lot of tax advantages to limited liability companies in California when they were first created. Alas, we are living in a state these days that needs money wherever it can find it. Given this, other business entities are often better choices for most small businesses. ******************************** The above discussion is intended to be a general commentary on legal issues. Each situation is different and this article is not intended as legal advice for your specific situation. Further, nothing in this article is intended to create an attorney-client relationship. If you have additional questions, please contact me. |
