Examples:

• • Jennifer, a graphic designer, formed an LLC to protect her personal assets from any liabilities of her design business.
  • Michael’s web development LLC elected S-Corp status to save on self-employment taxes on a portion of the company’s profits.
  • ABC Consulting LLC has two members, John and Sarah, who each own 50% of the company.
  • Rather than paying corporate income tax, 123 Marketing S-Corp’s profits flow through to Rick and Diane’s individual tax returns.
  • As an S-Corp, Axiom Business Services Inc. must follow stricter rules, like having regular board meetings and keeping corporate records.

How to Proceed:

• • Assess your business needs and goals to determine if an LLC or S-Corp makes more sense for your situation.
  • Consult with a business attorney and tax professional to understand the legal and financial implications of each entity type.
  • If you choose an LLC, decide if you want it taxed as an S-Corp to potentially save on self-employment taxes.
  • Confirm all business owners are eligible to be members (LLC) or shareholders (S-Corp) under the entity rules.
  • Evaluate if you’re prepared to follow the more stringent record-keeping and reporting requirements of an S-Corp vs. LLC.

FAQs:

• • Can an LLC elect S-Corp status? Yes, if it meets eligibility criteria like having 100 or fewer members and only one class of ownership.
  • Are S-Corps really better for saving on taxes? It depends – S-Corps can save on self-employment taxes, but costs of more complex accounting and payroll may outweigh savings for some.
  • How are LLCs and S-Corps similar? Both provide limited liability protection, have pass-through taxation, and are governed by an operating agreement.
  • What if I’m the only owner – LLC or S-Corp? Single-member LLCs are simpler; S-Corps must follow corporation rules even with one owner.
  • Can I form an LLC or S-Corp without an attorney? You can, but it’s wise to get professional legal and tax guidance to ensure you properly structure and operate your entity.

Examples:

• • Sarah checked the CA Business Search portal to make sure her desired LLC name “Sarah’s Staging Services” was available.
  • ABC Business Filings served as the registered agent for 123 Software LLC, with their office address on file to accept official correspondence.
  • Maggie filed Articles of Organization with the CA Secretary of State and paid the $70 filing fee to officially form her LLC.
  • The members of Pinnacle Plumbing LLC signed an operating agreement outlining each of their roles, responsibilities, and profit shares.
  • After incorporating, Jen’s Diner Inc. applied online for an EIN to use for setting up their business bank account and filing taxes.

How to Proceed:

• • Brainstorm business names and check availability on the CA Secretary of State’s Business Search portal.
  • Choose an individual or professional service to serve as your registered agent and receive official notices.
  • Complete the appropriate Articles of Organization (LLC) or Incorporation (S-Corp) and submit to the state with required fees.
  • Hold an organizational meeting with co-owners to discuss and memorialize key operating rules and procedures in a written agreement.
  • Visit IRS.gov and complete the online EIN application to receive your federal employer identification number.

FAQs:

• • How much does it cost to form an LLC in California? The minimum state filing fee is $70, plus any additional costs for a name reservation, registered agent, etc.
  • Can I be my own registered agent? Yes, as long as you have a physical street address in CA (not a PO box) and are generally available during business hours.
  • Are operating agreements legally required? Not by CA law, but highly recommended to define important provisions and prevent disputes.
  • Who is eligible to get an EIN? LLCs, corporations, partnerships, and sole proprietors needing to file business taxes, hire employees, or open business bank accounts.
  • What happens if I don’t follow corporate formalities? You risk losing your limited liability protections if you blur the lines between personal and business affairs.

Examples:

• • After forming, ABC Consulting LLC opened a business checking account to deposit client payments and pay business expenses.
  • Olivia got a business credit card for her photography LLC to purchase new lenses and lighting equipment, earning cash back rewards.
  • 123 Software Co. used cloud-based accounting software to track invoices, payments, payroll, and generate key financial reports.
  • Rather than pay for marketing services out of personal funds, XYZ Inc. wrote a check from the business account to maintain separation.
  • Baker Architects LLP hired a CPA specializing in small businesses to manage their books, prepare tax returns and advise on financial matters.

How to Proceed:

• • Research business-friendly banks and credit unions, gather your EIN and state filing docs, and open business checking and savings accounts.
  • Compare business credit card options and apply for one with favorable rates, credit limits, and rewards for your typical spending.
  • Choose a bookkeeping system (DIY spreadsheets, software, or outsourced) to consistently track business income and expenses.
  • Implement a policy to always use business accounts/cards for business transactions and transfer any personal funds used back to yourself.
  • Interview local business accountants and CPAs, select one you trust, and schedule regular check-ins to review your financial health.

FAQs:

• • Do I really need a separate business bank account? Yes – it’s crucial for liability protection, clear recordkeeping, and easier accounting/taxes.
  • What if I accidentally use my personal funds for a business expense? Document it and pay yourself back from the business account as soon as possible to maintain separation.
  • How should I track my business income and expenses? However works for you – a simple spreadsheet, app, software like Quickbooks, or outsourced bookkeeping service.
  • What business expenses can I write off on my taxes? Common deductions include equipment, supplies, home office, mileage, insurance, and professional services – check with your CPA.
  • When should I hire a business accountant? Right away if possible to make sure you properly set up your bookkeeping, plan for taxes and maximize deductions from the start.

Examples:

• • Emily updated her LLC’s address and added a new member when filing the required Statement of Information form each year.
  • Cali Law Firm Inc paid the minimum $800 franchise tax and an additional amount over $800 since their annual income exceeded the threshold.
  • Megan made sure to renew her cosmetology license every two years in order to continue legally operating her salon LLC.
  • Ace Auto Parts Inc. registered for a Seller’s Permit, collected sales tax on taxable items, and filed quarterly returns with the CDTFA.
  • When a member left the company and was replaced, Bluebird Design LLC filed an amendment with the state reporting the ownership change.

How to Proceed:

• • Put annual report filing deadlines on your business calendar, gather the required info, and submit the Statement of Information when due each year.
  • Work with your CPA to calculate your owed franchise tax each year based on business income and pay it to the Franchise Tax Board.
  • Research any state, county, or city business licenses needed for your industry, obtain them before commencing work, and renew as required.
  • Determine if you make any taxable sales, register with the CDTFA, set up a process to collect and account for sales tax, and remit taxes quarterly.
  • Whenever key business details change, like your address, ownership, or legal structure, promptly update your state filings and registrations.

FAQs:

• • How do I file the annual Statement of Information? File form LLC-12 or SI-550 with the Secretary of State, along with the $20 filing fee.
  • How much is the CA annual franchise tax for LLCs and Corps? At minimum $800 per year (waived the first year for corporations only), plus a possible additional California Gross Receipts Tax for LLCs with gross receipts exceeding $250,000, and an additional 1.5% franchise tax on net income for S-Corps.
  • What business license(s) do I need? It varies widely by industry and locality – check with your city/county business office and relevant state licensing boards.
  • Do all businesses have to pay sales tax? No, only those selling tangible goods or certain services, and you can usually pass it on to customers rather than pay out of profits.
  • What happens if I don’t comply with state requirements? You could face penalties, tax liabilities, licensing issues, or in extreme cases administrative dissolution of your LLC/Corp.

Examples:

• • Palisades Partners LLC held their required annual member meeting each December to vote on any major issues and record official minutes.
  • When Cali Consulting Inc.’s board voted to issue new stock, they adopted a formal written resolution and filed it in their corporate records book.
  • Smith & Sons LLP contracted with a professional registered agent service to maintain their official address and accept service of process.
  • The owners of Green Thumb Landscaping LLC were careful to always sign contracts in their official capacity as members, not personally.
  • 123 Imports Co. made sure to follow all customs regulations, properly classify goods, and pay appropriate tariffs on their products.

How to Proceed:

• • Arrange and give proper notice for required member, shareholder, or board meetings; prepare an agenda; record minutes; and keep with your business records.
  • Whenever members or the board makes a major decision, document it in a resolution or meeting minutes and add to your corporate records.
  • Appoint a reliable individual or company as your registered agent, give them written consent to serve, and file their name/address with the state.
  • Implement internal controls to avoid mixing business and personal assets, like strict policies on business account/card usage and expense reimbursement.
  • Have your attorney and CPA advise you on key regulatory compliance issues for your industry and develop systems to stay in good standing.

FAQs:

• • How often does my LLC or S-Corp need to hold meetings? S-Corps must hold regular board and shareholder meetings, while regular meetings for LLCs are recommended but not legally required.
  • What should I document in meeting minutes? Key decisions, votes, resolutions, elections/removals of members or directors, major company changes, etc.
  • Can I be my own registered agent? Yes, or you can appoint another individual or a professional service, as long as they have a physical CA address and are available during business hours.
  • What are some examples of improper mixing of business and personal? Paying personal expenses from a business account, not reimbursing personal funds spent on business costs, or personally guaranteeing business loans.
  • What happens if I don’t follow corporate formalities? You risk losing your limited liability status and could be held personally liable for business debts and legal issues.

Examples:

• • ABC Tech LLC used a standard job application, documented interviews, and kept rejection reasons on file in case of discrimination claims.
  • Growth Enterprises Inc. carefully assessed each worker’s duties against IRS criteria to determine if they should be paid as an employee or 1099 contractor.
  • When Mei hired her first employee at Mei’s Marketing LLC, she registered for CA payroll taxes and set up a payroll system to withhold and remit taxes.
  • Smith Plumbing Co. made sure to purchase workers’ comp coverage as soon as they hired an employee to comply with state law.
  • 123 Electronics LLC ordered the required state/federal labor law posters and posted them prominently in the employee breakroom.

How to Proceed:

• • Develop a standard hiring process with employment applications, interview questions, background checks, offer letters, and I-9 verification.
  • Evaluate the level of control and independence of each worker to properly determine employee or contractor status and pay them accordingly.
  • Register with the IRS, CA EDD, and sign up for a payroll service or software to manage employee tax withholding, filing, and payment.
  • Secure required insurance for employees like workers’ comp, disability, and unemployment; consider other benefits like health insurance and retirement plans.
  • Display all required state and federal employment notices in a common area, keep up with any mandatory changes, and provide certain notices to employees directly.

FAQs:

• • What should be included in an employment application? Basic contact info, position sought, employment history, education, references – but no prohibited questions about age, race, religion, etc.
  • How do I determine if a worker is an employee or contractor? Look at behavioral control, financial control, and the overall relationship – the more control the company has, the more likely they are an employee.
  • What payroll taxes am I responsible for as an employer? Social Security and Medicare (FICA), federal and state income tax withholding, and federal and state unemployment taxes (FUTA/SUTA).
  • Do I have to provide health insurance to my employees? Under the ACA, employers with 50+ full-time employees must offer health coverage or pay a penalty tax.
  • What are some required employee notices in California? Wage orders, paid sick leave, workers’ comp, disability and paid family leave, sexual harassment, and more.

Examples:

• • Sarah paid herself a $60,000 salary from her marketing S-Corp, saving on self-employment taxes she would have paid as a sole prop or LLC.
  • ABC Consulting LLC claimed a 20% deduction on its net business income, effectively paying taxes on only $80,000 of its $100,000 in profits.
  • XYZ Corp. deducted expenses like office rent, computer equipment, employee wages, insurance premiums, and legal/accounting fees.
  • 123 Manufacturing Inc. used bonus depreciation to fully write off the cost of new machinery in the year it was purchased and placed in service.
  • Maggie hired her teenage son to help with business tasks, paid him a reasonable $6,000 wage, and owed no income or payroll taxes on his earnings.

How to Proceed:

• • Work with your accountant to determine a reasonable salary for S-Corp shareholders, balancing tax savings with IRS rules.
  • Ask your CPA if your LLC or S-Corp is eligible for the 20% QBI deduction and to calculate the deduction on your personal return.
  • Track all ordinary and necessary business expenses throughout the year, keep receipts/records, and claim eligible write-offs on your business tax return.
  • Assess whether your long-term business assets qualify for regular depreciation, bonus depreciation, or Section 179 expensing – your CPA can advise.
  • If hiring family, ensure their wages are reasonable for the work performed, properly document the employment relationship, and follow all payroll and reporting laws.

FAQs:

• • What’s a “reasonable salary” and why does it matter? A fair market wage for the S-Corp owner’s role – too low and the IRS may reclassify distributions as salary, erasing tax savings.
  • What businesses are eligible for the 20% pass-through deduction? What businesses are eligible for the 20% pass-through deduction? Generally, eligible self-employed and small-business owners with qualified business income below certain thresholds (check with your CPA for the latest limits).
  • What business expenses typically can’t be deducted? Anything personal (clothes, home, commute costs), lavish, illegal, or not ordinary and necessary for your business.
  • Can I take bonus depreciation on a personal vehicle used for business? If used over 50% for business, you can use bonus depreciation based on the business use percentage.
  • What paperwork do I need to hire my child in my business? Have them complete a W-4, I-9, and any required state forms; keep a time sheet; and give them a W-2 at year-end.

Questions: LLCs & S-Corps

• • 1. What are the key similarities between LLCs and S-Corps?
    • A) Limited liability protection
    • B) Pass-through taxation
    • C) Governed by an operating agreement
    • D) All of the above
  • 2. Which of the following business taxes are LLCs and S-Corps in CA subject to?
    • A) Federal income tax
    • B) State franchise tax
    • C) State LLC fee on income over $250,000
    • D) B and C only
  • 3. When should an LLC consider electing S-Corp status?
    • A) When it wants to save on self-employment taxes
    • B) When it has foreign owners
    • C) When it plans to go public
    • D) When it has more than 100 members
  • 4. Which statement is true about S-Corp taxation?
    • A) S-Corps are taxed at the corporate level
    • B) S-Corp profits are only subject to payroll taxes
    • C) S-Corp owners can take cash distributions and only pay income tax, not self-employment tax
    • D) S-Corps can deduct business losses on personal tax returns
  • 5. Which of the following records should LLCs and S-Corps keep?
    • A) Meeting minutes and resolutions
    • B) Accounting and tax records
    • C) Licenses and permits
    • D) All of the above

Answers: LLCs & S-Corps

• • 1. D) All of the above – LLCs and S-Corps share the key characteristics of limited liability, pass-through taxation, and being governed by an agreement.
  • 2. D) In California, both LLCs and S-Corps must pay the annual $800 franchise tax and an additional graduated fee on income over $250,000 for LLCs or and an additional 1.5% franchise tax on net income for S-Corps.
  • 3. A) LLCs may elect S-Corp status to save on self-employment taxes, as owners can take a reasonable salary and distributions that aren’t subject to SE tax.
  • 4. C) S-Corp owners can receive both salaries (subject to payroll taxes) and profit distributions (taxed only as income), providing potential tax savings over an LLC.
  • 5. D) LLCs and S-Corps should keep thorough records, including meeting minutes, financials, tax filings, contracts, licenses, and more to stay compliant and maintain liability protection.

Questions: Business Compliance

• • 1. How often must California LLCs and S-Corps file a Statement of Information?
    • A) Every year
    • B) Every 2 years
    • C) When information changes
    • D) A and C
  • 2. What employment posters must California businesses display?
    • A) Federal minimum wage
    • B) CA Paid Sick Leave
    • C) Workers’ compensation
    • D) All of the above
  • 3. When must a CA LLC or S-Corp register with the CDTFA?
    • A) If it sells any goods
    • B) If it sells taxable goods or services
    • C) Only if it makes over $100,000/year
    • D) Registration is optional
  • 4. What’s the minimum workers’ compensation requirement in CA?
    • A) Coverage required when you hire 1 employee
    • B) Coverage required when you hire 5 employees
    • C) Coverage required for all workers, even contractors
    • D) Coverage is optional for small businesses
  • 5. What’s a key benefit of having an operating agreement or bylaws?
    • A) Clarifies ownership and management structure
    • B) Can help prevent disputes among owners
    • C) Demonstrates separation between owners and business
    • D) All of the above

Answers: Business Compliance

• • 1. D) LLCs and S-Corps must file a Statement of Information annually and whenever key business information changes.
  • 2. D) California employers must display posters on many topics, including minimum wage, paid sick leave, workers’ comp, and more.
  • 3. B) Businesses must register with the CDTFA if they sell taxable goods or services, regardless of revenue level.
  • 4. A) In CA, workers’ comp coverage is mandatory as soon as you hire your first employee – owners are excluded.
  • 5. D) Having a written operating agreement or bylaws offers many benefits, including clarifying roles, preventing conflicts, and reinforcing limited liability status.

Disclaimer

The information provided in this article regarding California LLCs and S-Corps is for general educational purposes only and does not constitute legal, tax, or financial advice. Laws and regulations may have changed since publication and application of the information to specific situations will vary depending on individual facts and circumstances.

For personalized guidance on setting up and operating your California LLC or S-Corporation, please consult with a licensed business attorney, tax professional, and financial advisor. Most reputable firms offer free initial consultations to discuss your business goals and legal needs.