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CPA Judy talks about LLC and S Corporations in California:
An LLC is not a separate tax entity like a corporation. A LLC it is what the IRS calls a pass through entity, like a partnership or sole proprietorship. All of the profits and losses of the LLC pass through the business to the LLC owners , who report this information on their personal tax returns. The LLC itself does not pay federal income taxes, but some states do charge the LLC itself a tax and it is important to understand as it pertains to California.
Sub Chapter S corporations that are doing business in California must pay a 1.5% net income tax. LLCs are not subject to this tax, but must pay an entity-level fee based on gross receipts.
If the business operates at a loss, the corporation form is generally preferable. If the entity operates at a profit, then the LLC will generally result in the lesser tax liability.
A S corporation. It must pay 1.5% net income tax. That means if the S corporation has a net income of $100,000 it would pay a tax of $1500.
LLCs in California taxed as partnerships must pay an entity level tax based on the "total income" reportable to California for the tax year.
"Total income" means worldwide gross income, plus the cost of goods sold, paid or incurred in connection with the LLC's business.
In 2006, the tax ranges from $900 to $11,790, as follows:
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Total Income from all sources |
Fee
|
| |
$0 -$2499,000 |
$0
|
|
Over $250,000, but less than $499,999 |
$900
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|
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$500,000 or more, but less than $999,999 |
$2,500
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|
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$1,000,000 or more, but less than $4,999,999 |
$6,000
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|
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$5,000,000 or more |
$11,790
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In California:
The S Corporation you pay tax on the NET INCOME.
The LLC you pay tax on the GROSS INCOME, not NET.
For example, if you are in a business that has about $500,000 in gross sales and has about a 15% net profit margin that will equal $75,000 in net income.
If your business was an S corporation, the S corporation would pay a tax of $75,000 X .$015 = $1,125.
If it was an LLC it would pay a tax of $900 plus $800 in franchise tax, or $1,700.
The LLC would pay more.
The profit margin is a very important factor. For example, assume a 10% net profit margin for LLCs add the $800 per year franchise tax.
| Gross Sales |
Net Income |
LLC Tax |
S Corp Tax
|
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$200,000 |
$20,000 |
$800 |
$300.00 |
|
$275,000 |
$27,500 |
$1,700 |
$412.50 |
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$600,000 |
$60,000 |
$3,300 |
$900.00 |
|
$900,000 |
$90,000 |
$3,300 |
$1,350.00 |
|
$1,200,000 |
$120,000 |
$6,800 |
$1,800.00 |
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$6,000,000 |
$600,000 |
$12,590 |
$9,000.00 |
But if you have a high profit margin business, for example 25% net profit margin
|
Gross Sales |
Net Income |
LLC
Tax |
S Corp
Tax |
|
$200,000 |
$50,000 |
$800 |
$750.00 |
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$275,000 |
$68,750 |
$1,700 |
$1,031.25 |
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$600,000 |
$150,000 |
$3,300 |
$2,250.00 |
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$900,000 |
$225,000 |
$3,300 |
$3,375.00 |
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$1,200,000 |
$300,000 |
$6,800 |
$4,500.00 |
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$6,000,000 |
$1,500,000 |
$12,590 |
$22,500.00 |
Bottom Line:
If your company has very high net profits, it will pay more tax with an S corporation. If you are going to be extremely profitable it would make more sense to be an LLC.
If you are operating at a loss or very low profit margin, an S corporation would be better.
The pages of this web site contain information that has been collected from many independent sources. Each article or new item offers a different points of view and resources. This information is for for general information only. If you desire to ask a specific question, feel free to contact me
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