California has recently allowed one person LLCs, and it has potential to save some costs over incorporating. A one person LLC is a “disregarded entity” for federal income tax purposes and therefore, a separate tax return for the LLC is not required unlike a corporation (saving professional tax preparation fees). Instead the results of the operation of the LLC are filed on Schedule C of the return of the owner. The LLC still owes California the minimum $800 fee however just as it would if filing as a multi-member LLC.
The negative of an LLC operationally is the “fee” goes up if the revenue of the LLC exceeds $250,000. This fee is not based on net income but instead on gross revenue. To avoid this fee, a growing LLC can elect to be taxed as a corporation by filing federal Form 8832 Entity Classification Election. By doing so, an LLC can elect to be taxed as a corporation (and then elect Subchapter S status) and avoid the fee when revenues exceed $250,000.
If the prior seems confusing, it is and before forming an LLC check with your accountant to make sure the choice makes sense for your situation.
Good luck and here’s hoping it “all adds up” for you.
(If there is any area in accounting or tax that you think needs to be addressed in this newsletter please e-mail Dick at Ginnatycpa@aol.com and if it is of general interest, he will address it in future articles)