Forming A California Llc: Mistakes To Avoid
Are you a California investor or small business owner in the process of forming a
limited liability company? Great! An LLC often minimizes business risks and delivers tax savings. But to make the process easier and minimize costs, you'll want to avoid three common mistakes:
Mistake #1: Ignoring the Franchise Tax
An LLC does do neat things for your legal protection and tax accounting. No argument there.
If you own a business or investment through an LLC, for example, you're not (and other owners won't be) liable for the LLC's debts or other obligations merely because of your ownership.
Furthermore, limited liabilities companies offer huge tax accounting benefits, including the ability to elect the tax treatment you want for the LLC: sole proprietorship, partnership, c corporation, S corporation, and so on.
Unfortunately, the state of California (rather uniquely among states) reduces the attractiveness of the LLC option. The state levies an annual LLC tax on limited liability companies. At a minimum, this tax equals $800, but the hit goes up based on the business's income rises.
The $800 annual franchise tax is pretty significant for some small (especially part-time) businesses. Verify, therefore, that limited liability company formation is even economically justified.
Many very small investments and businesses, very frankly, probably can't justify paying $1,000 or more for the benefits the LLC option delivers.
Mistake #2: Planning for Quick Setup
Another mistake related to forming an LLC in many states--including California--is this. State government offices that process LLC applications are now taking longer and longer to stamp the paperwork "approved." And that means you need to plan ahead and factor the delays into your business and investment plans.
Currently, for example, California takes approximately two months (58 days) to certify the LLC articles of organization. And that's pretty crazy. Even if you're ready to start hiring people and paying taxes today, you will need to cool your jets almost two months.
Mistake #3: Using a Nevada Corporation or LLC
One other mistake you won't want to make is using a Nevada corporation or Nevada LLC.
With the massive hassle-factor of incorporating California limited liability corporation, you might wonder whether you can just go next-door to Nevada.
Most states don't tax businesses as harshly as California does. And most states don't make businesses wait for months to start operations.
But practically speaking, you can't simply "opt" for incorporating in another state. If you're operating your business or making an investment in California, you either need to use a California LLC or corporation... or if you've initially setup up a corporation in another state (like Nevada) you'll need to register your Nevada entity as a foreign corporation or foreign LLC operating in California.
Foreign registration with California, by the way, means you're right back at square one: Registration of the foreign corporation or LLC takes months, too. And foreign LLCs pay the dreaded franchise tax--just like domestic LLCs.
by: Stephen Nelson
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