Confusion on CA minimum tax laws imposed on LLCs... help! (insurance, how much)

[thepinksquid]

My husband and I recently formed an LLC in the state of California for our web design / development business (prior to this we did this work at a sole proprietorship in Florida, but now decided to be nice and safe and form the LLC).

I was aware of the minimum tax of $800 imposed to all businesses in California, however I mistakenly thought that LLCs were exempt from the amount in their first year of business. However, it looks like I was wrong and that corporations are the only businesses exempt for the first year. Okay, fine, I can deal with that.

...but...

With the materials we got in the mail today about our LLC (form FTB-3522 specifically), it looks as if we have to pay the $800 tax RIGHT AWAY within the first four months of doing business. We haven't even made anything yet through the business! We were planning on making our fiscal year begin June 1. Am I reading this correctly that since the fee is due "by the 15th day of the 4th month after the beginning of the fiscal year" we have to send in the state $800 by October 15th? That sucks. Furthermore, if that is the case, when it comes time to pay our taxes for fiscal year 2009, is that $800 paid by October of this year already applied to our taxes that we would be paying in 2010?

However, if we don't wish to do this and decide to dissolve the LLC ASAP and just be a sole proprietorship like we were previously, do you we still have to pay up the $800, even if we made no money?

I hope someone has some insight on this... because, quite frankly, this whole thing is worrying me a bit. :/

[BennyPhoenix]

You are either misinformed or getting bad info.
There is no state business tax in calif for LLCs. Business taxes are local, that is, cities impose them, not the state.
The $800 fee you are talking about is to register in calif as an LLC. If you are not an LLC then you do not pay the $800. But most cities in calif do have some sort of business tax. The business tax is usually not a lot of money, but it is a pain in the a$$ to file the paperwork without the city messing it up somehow and claiming you did not pay it or pay enough. I go through it every year and it is amazing how much of my time and the time of some clerk for the city is spent when I only end up paying about $300 or so.

On a related note, some states charge $50 or less to register as an LLC. If you can relocate somewhere else you'd save quite a few bucks.

[LASam]

Couldn't you just get a PO Box in the state of Delaware and register an LLC there... I believe that state is very business friendly.

[BennyPhoenix]

Originally Posted by LASam

Couldn't you just get a PO Box in the state of Delaware and register an LLC there... I believe that state is very business friendly.

You are thinking a regular corporation. For an LLC If you have a physical presence in calif You'd still need to register as an LLC in calif and pay the $800. Calif wants their money.

[e_cuyler]

Check with the FTB. I think if you meet certain criteria you can dissolve and avoid paying the LLC fee, but I would try to determine what exactly you need to pay in October first. I believe there is a worksheet available to determine the amount of estimated tax that is supposed to be paid by that deadline.

Depending on the nature of the business, it might be better to just get liability insurance and continue to operate as a sole proprietorship. Couldn't hurt to contact a CPA.

I do know that if you pay the $800 and later find out you can dissolve without needing to pay the fee, you can't get it refunded.

[thepinksquid]

Originally Posted by BennyPhoenix

You are either misinformed or getting bad info.
There is no state business tax in calif for LLCs. Business taxes are local, that is, cities impose them, not the state.
The $800 fee you are talking about is to register in calif as an LLC. If you are not an LLC then you do not pay the $800. But most cities in calif do have some sort of business tax. The business tax is usually not a lot of money, but it is a pain in the a$$ to file the paperwork without the city messing it up somehow and claiming you did not pay it or pay enough. I go through it every year and it is amazing how much of my time and the time of some clerk for the city is spent when I only end up paying about $300 or so.

On a related note, some states charge $50 or less to register as an LLC. If you can relocate somewhere else you'd save quite a few bucks.

Trust me, there is definitely a minimum tax of $800 imposed on businesses (both corporations and LLCs) in California. They call it their "franchise minimum tax". California Business Portal - Limited Liability Companies - Frequently Asked Questions

To register as an LLC in California it cost us $70. We already have done that.

[e_cuyler]

Yep, LLCs pay it every year. Think partnerships have to do the same.

[icebert]

Hi - I'm a CPA and file these for a few clients in CA. Yes, the 800 is due something like 2.5 months after the beginning of the tax year, but the total, with interest and penalties, usually comes out to be no more than 850 if paid with the extension 2.5 months after the tax year end. Many clients just choose to pay it then.

Also, there's an LLC fee that you will be subject to if your gross receipts (in California) from the business equal a certain amount or above:
250,000: 900
500,000: 2,500
1,000,000: 6,000
5,000,000: 11,790

These are supposed to be paid in the second quarter of your tax year on form 3536. Hope this helps.

[thepinksquid]

Originally Posted by icebert

Hi - I'm a CPA and file these for a few clients in CA. Yes, the 800 is due something like 2.5 months after the beginning of the tax year, but the total, with interest and penalties, usually comes out to be no more than 850 if paid with the extension 2.5 months after the tax year end. Many clients just choose to pay it then.

Also, there's an LLC fee that you will be subject to if your gross receipts (in California) from the business equal a certain amount or above:
250,000: 900
500,000: 2,500
1,000,000: 6,000
5,000,000: 11,790

These are supposed to be paid in the second quarter of your tax year on form 3536. Hope this helps.

Thanks so much for your input.

I ended up calling the franchise tax board today and got most of my questions answered.

She told me the same thing you mentioned in that it's better for us to not pay the $800 now unless we're completely sure that we'll want to stay as an LLC and not dissolve, because at worst the penalties would be < $100.

I guess the only concern I have now is that I'm wondering whether or not we should do a calendar year or a fiscal year end for our business. From the way the woman on the phone explained it to me was that since the state of CA filed our business on May 26, if we did a fiscal year beginning on June 1 we would be liable to pay $800 for the "year" that occurred between May 26 to June 1, and the another $800 for June 1 onward. That seems so odd to me. I called again and spoke to another person who told me that California lets you "round up" and start your fiscal year at the beginning of the next month if there was less than 15 days from the filing of your business to the next month. I would rather do a fiscal year beginning in June because then we could get a whole year's worth of business before having to pay the $800 again, instead of only about 6 month's worth. Do you know which one is true?

Thanks again!

[youngmoney]

Why does the government need $800 from every business? As a business owner myself (out-of-state), i don't know many business owners that care for feeding the hand of a business bureau. Who knows what that money is used for? I know as a business owner I do not incur $800 in expenses for the government in any department.

We are hit with fees to incorporate, yearly fees, change of name fees, change of agent fees, and so on and so forth... So where is this $800/yr going to... welfare?

Then we are punished by the amount of gross reciepts? ... why? Is this for redistribution of wealth?